Journalist’s Ain Alvela interview with an aviation expert Toomas Peterson, who thinks that involving a core investor should help alleviate the company’s financial concerns, enable the purchase or lease of new aircraft, reduce management costs, and, above all, build trust.
The controversy surrounding the future of the Latvian airline Air Baltic in recent months has led to some conflicting opinions. The company’s executives assert that everything is under control and that Air Baltic will soon receive a significant capital injection from a strategic investor. However, some aviation experts believe that the current developments are not particularly sustainable.
Until now, Air Baltic has been seen as a success story in Baltic aviation, especially when compared to the rocky history of the Estonian airlines – Estonian Air and its successor Nordica. Concerns around Air Baltic began after it was revealed that the Latvian national airline had suffered significant losses in the first half of the year. Specifically, Air Baltic recorded a loss of 88.8 million euros in the first half of this year, despite generating 339.3 million euros in revenue. This is particularly notable considering that the airline was profitable during the same period last year, with a profit of 14.6 million euros.
First half-year loss and an extremely expensive loan
Concerns about Air Baltic’s financial stability were further elevated by the company’s decision in May to issue bonds worth 340 million euros, with a five-year term and an interest rate of 14.5%. Analysts consider this to be an extremely high-interest rate in such a context, which, according to them, indicates that no one was simply willing to offer the airline a cheaper loan. Borrowing this money from the market essentially means postponing the need for capital, with hopes pinned on an IPO and a core investor.
Now, several people familiar with the aviation industry believe that Air Baltic’s ambitious expansion plans, which require new cash flows, culminated last year when the company began selling a massive number of tickets at extremely low prices for this summer. Although the money did come in, it was at the expense of the financial results for the first half of 2024, as the funds were insufficient to sustain the airline’s long-term viability. As a result, there was even an oversale of economy class tickets, forcing the airline to accommodate customers who had purchased low-priced tickets in business class and other similar measures.
In any case, the Latvian national airline Air Baltic plans to go public. It is expected that a strategic investor willing to acquire a minority stake in Air Baltic will be necessary to make this happen. Both Latvian Minister of Transport Kaspars Briškens and Air Baltic CEO Martin Gauss have confirmed that such an investor has been found, but neither has been willing to disclose their name. The media has speculated about almost all the major European airlines, such as Air France, LOT, Lufthansa, KLM, and British Airways. It is assumed that this investor should be a reputable aviation company to instil confidence in investors during the IPO.
On the other hand, this trust is undermined by the inconsistent communication from both the airline itself and the Latvian government regarding Air Baltic’s preparations to go public. For example, one day it is announced that the airline’s share capital will be reduced by more than 572 million euros (leaving only 25 million euros), and the next day, Latvian President Edgars Rinkēvičs states that no such decision has been made. How will this kind of communication affect the company’s credibility in the eyes of potential investors remains to be seen.
In any case, aviation expert Sven Kukemelk expressed extreme scepticism in mid-August to ERR regarding Air Baltic’s plans to go public, noting that the company has only shown a profit in a few of the past twenty years. Kukemelk pointed out that borrowing money at such a high cost is a sign of a company in serious trouble, and he does not see why any investor would want to invest in such a company.
Estonian Air failed, Air Baltic’s fate depends on the IPO
Aviation expert Toomas Peterson, who once led both Estonian Air and the Estonian Civil Aviation Administration, believes that Air Baltic’s traditional national airline business model is not sustainable in today’s economic environment and rapidly changing aviation market. According to Peterson, the situation in which the Latvian airline currently finds itself is somewhat comparable to the path Estonian Air took years ago, as both started from fairly similar positions. The key difference, however, is that Estonia did not receive state aid approval from the European Commission for Estonian Air, whereas Latvian officials somehow managed to secure a 250-million-euro capital injection for Air Baltic. However, Estonian Air also sought a strategic investor at the time. Ultimately, it found one in Maersk Air, although there was also an offer from SAS on the table. Maersk Air’s stake was later sold to the Swedes after its owner’s death in 2003, gradually becoming part of SAS.
Former Estonian Air pilot Raivo Kask recalls the few years at the beginning of the century when Estonian Air was profitable. However, just a few years after leasing the first Boeings, the Americans started asking for the repayment. But there was nothing to pay with. In 2010, the Estonian state became the majority shareholder of Estonian Air again, at a time when the airline was deeply in debt. Although new aircraft were acquired and passenger numbers grew, the airline could not overcome its poor financial situation, and Estonian Air made its last scheduled flight in November 2015. Just a few days before the end of the year, the bankruptcy of Estonia’s national airline was declared. Today, even the majority stake held by the Swedes in SAS is history, as the company recently underwent restructuring in the U.S.
According to Raivo Kask, the decline began during the time when Erkki Urva was leading Estonian Air. The company was profitable and wanted to start flying to Vilnius. However, the SAS headquarters said no, Air Baltic would fly there instead, as SAS also held a majority stake in Air Baltic at that time. “That’s when we started going downhill. Profit turned into loss, they tried various approaches, and there were rumours about the exceptionally high salary of the Finnish CEO at the time, which he was supposed to receive if he turned the company around. But who cared? And so, Estonian Air never returned to profitability,” Raivo Kask describes the downward spiral.
The success of an airline depends on trust, but conflicting news undermine it
Toomas Peterson acknowledges that a statement from his August interview, where a journalist quoted him as saying that Air Baltic is on the verge of collapse, was overly radical and does not accurately reflect his true thoughts. However, he admits that the airline has given the public mixed messages, making it difficult to predict its future. Peterson believes that it is inappropriate to make sweeping claims about an airline, such as predicting imminent bankruptcy, because an airline essentially sells trust when it sells tickets far in advance – customers purchase tickets with the firm belief that the flight will take place as scheduled. At the same time, advance ticket sales are crucial for the company to ensure cash flow.
He notes that Air Baltic’s financing has historically involved relatively opaque schemes for the public, which has led to mixed opinions about the airline. Recently, Air Baltic announced plans to open five new direct routes from Tallinn, four from Riga, and seven from Vilnius next summer. “The concern is that if Air Baltic fails to execute the IPO and this current rapid expansion requires substantial financial resources, continuing in its current form will not be sustainable,” Toomas Peterson argues. “In my view, there is a flaw in the business model – a desire for large scale to generate profit from but achieving that requires significant investment. Meanwhile, the 14.5% bond issuance indicates that Air Baltic’s financial situation is not that good.”
Peterson states that a company’s financial results can be presented to the public in various ways, highlighting certain aspects while omitting others. Air Baltic employs this tactic, interpreting certain metrics differently. He understands this approach given the goal of successfully completing the IPO but emphasizes that communication should still be accurate. “If Air Baltic succeeds in finding a strategic partner, aviation-specific synergies could come into play, and with that, the business model could become stronger,” he notes. “However, if an investor is not found, such a business model will require continuous financial support, as our local market is small, with few transit flights, and so on. This support could be provided through the airport, for example, by reducing fees to encourage airlines to operate from this region. But small countries like Estonia and Latvia do not necessarily need to have their own airlines.”
Future investors are primarily interested in Air Baltic’s market share
Toomas Peterson explains that consolidation is currently taking place in European aviation, largely because achieving economies of scale is essential to keeping flight costs as low as possible, which is crucial for survival and success in this market. Small airlines cannot achieve this. He emphasizes the importance of securing a new investor for Air Baltic before the IPO, because if it turns out to be a well-known and respected aviation company – as hinted by Air Baltic’s management – then that would undoubtedly generate trust in the stock issuance.
“Consolidations always involve acquiring market share. It is currently difficult to say whether this could eventually lead to the complete absorption of Air Baltic. At the moment, the Latvian government has taken a stance that would block the liquidation of the company without their consent,” says Peterson. “Involving a core investor and finding other retail investors should help alleviate the company’s financial concerns, enable the purchase or lease of new aircraft, reduce management costs, and, above all, build trust. When it comes to IPOs, it is important to determine whether new shares are being offered or if existing shareholders are selling their shares. The sale of new shares provides the company with funds for business development or growth. In contrast, the sale of existing shares provides money to current owners, who may or may not reinvest in the company’s development. Currently, Latvian officials and politicians are sending mixed signals about whether and to what extent equity will be altered, and it is unclear if existing shares will also be sold.”
Peterson believes that theoretically, the contribution of a core investor should lower the cost per passenger, which could potentially lead to a reduction in ticket prices. However, this is not guaranteed, as it largely depends on the market situation and how the new capital is utilized. For example, whether the funds are used to reduce the company’s massive debt, which stands at approximately 1.3 billion euros, or are invested in new aircraft and the company’s expansion. “In other words, this would create the conditions for reducing the airline’s costs and, consequently, potentially lowering ticket prices,” he notes.
All in all, Air Baltic’s CEO Martin Gauss remains optimistic and believes the company will experience double growth over the next five years. At the same time, he keeps the identity of the strategic investor closely guarded, merely noting that negotiations are ongoing and that the public will be surprised when the results are announced. Kaspars Briškens has confirmed the Latvian government’s stance that 25% plus one share will remain with the Latvian state. This is intended to prevent the new core investor from completely absorbing the airline. Air Baltic hopes to raise 300 million euros through the IPO. The European Commission has also demanded a reduction in the state’s shareholding.