Mike Collier in Riga -

Latvian airline airBaltic is a strange sort of success story - its network of more than 70 destinations is unrivalled in the region, it was voted "Airline of the Year 2009-10" by the European Regional Airline Association and last year it transported 3m passengers. Its luminous green branding can be seen on everything from its planes to taxis and bicycle rental stations, and the passengers it carries pump millions into the Latvian economy. But that success looks increasingly imperilled with government ministers at war over whether it is on the verge of going bust, a chief executive who's scared to even enter the country from Germany and serious questions about the company's opaque ownership structure.

In short, the fate of airBaltic has become a test case for the whole of the Latvian business environment, a fact repeatedly stressed at a June 30 meeting of the American Chamber of Commerce in Latvia, which has long been pressing the government for investment opportunities and more transparency by listing publicly owned companies on the Riga stock exchange.

Prime Minister Valdis Dombrovskis admitted the situation was bad and that the airline has "certain issues with transparency". "AirBaltic is exactly an example of how the state should not run a business," he said. "Listing the company on the stock exchange would have been an excellent idea... but unfortunately we cannot do so."

Grounded

The reason a listing is unlikely anytime soon is because the airline's two main shareholders, the Latvian state with 52.6% and Baltic Aviation Systems (BAS) with 47.2%, are at each other's throats.

The latest round in a long-running saga of mutual antipathy took off on June 10 when Economy Minister Artis Kampars claimed in a radio interview that the company was haemorrhaging money at an alarming rate - LVL18m (€25m) in the first five months of the year - was close to insolvency, and that government money being pumped into it (LVL15m last year) was being "pumped out" to privately owned offshore companies.

That sparked a furious reaction from airBaltic CEO and BAS co-owner Bertolt Flick (the other BAS shareholder being Bahamas-registered Taurus Asset Management, thought to be linked to Russian billionaire Vladimir Antonov), who was perhaps understandably concerned that such reckless talk would cause flyers to stop making bookings. In response, he pulled his two representatives from the five-member governing council of the company. With four out of five votes needed to approve decisions, it effectively prevented the council from making any decisions at all. In Dombrovskis' words, "The majority shareholder cannot function."

Kampars' claims also sparked a row between himself (from Dombrovskis' Unity political bloc) and Transport Minister Uldis Augulis (from the oligarch-influenced ZZS bloc), who is supposed to be responsible for the government's stake in the airline, adding a dose of political rivalry to an already confused situation. By Augulis' reckoning, the government should be ready to either keep pumping money into airBaltic or bring in new private investors.

Then on June 14 when Latvian journalists checked their inboxes, they found an unusual offer. airBaltic would fly anyone who cared to go to a press conference that Flick was holding the next day at a hotel - in Berlin. While the joke in media circles was that journalists would use the offer to get stories about Riga mayor Nils Usakovs (undergoing treatment at a Berlin hospital), those that did take a ticket heard Flick blasting the Latvian government's "aggression" - a reference to anti-corruption raids in late May that had included both airBaltic offices and Flick's private residence. Furthermore, Flick said he would not be returning to Latvia unless he receives a guarantee that he would not be arrested - a guarantee which has not been forthcoming.

By June 28, an audit conducted by KPMG revealed that the airline had actually lost LVL13m (€18m) in the first five months of the year. Losses had reached as high as Kampars' claimed LVL18m in the first quarter, but profitability returned in April and May when the summer booking season had kicked in.

Since then, the Mexican stand-off between the major shareholders has continued, with the government preoccupied by looming elections in September (ironically, indirectly triggered by the very raids that caused Flick to flee the country) and Flick complaining the government has been changing its own council members so frequently it is making work (and approval of the 2010 accounts) nigh on impossible and warning that without fresh investment of about LVL100m in the medium term and much more in coming years to modernise its fleet, it cannot hope to stay competitive.

White knights

Meanwhile, the names of potential investors and/or buyers for the company are doing the rounds. China's Hainan Airlines has been linked to an airBaltic buy-in for nearly a year as a way into the European aviation market. At a recently low-key meeting with Augulis, a senior Hainan figure offered to buy all airBaltic shares, according to the investigative TV show "Nothing Personal" on June 12. No price was quoted. Hainan is also reportedly in talks with Malev Hungarian Airlines.

British company Ocean Sky, which operates flight brokerage, aircraft charter, aircraft management, aircraft engineering and aircraft interior services, is the only company so far to have confirmed its interest. "I can confirm that we have sent a offer to participate in the coming capital increase of airBaltic," Ocean Sky's Jenna Prior tells bne. "It complements the services that our group provide."

But in such a confused situation, no-one is sure of the motivation for any sale or capital increase. Depending on whom you ask, it could be an exit strategy for Flick, an exit strategy for the government, a way for BAS to gain a majority stake, or - who knows - maybe a genuine commercial opportunity?

Speaking to the Dienas Bizness daily on July 9, Jay Sorensen of aviation industry consultancy Ideaworks pointed out that seen from outside, airBaltic remains an attractive proposition. "The European aviation industry is consolidating and airBaltic could be a winner in this process," he said. "The company's management has done great work in developing an important aviation base in a small country like Latvia... an offer to sell part of the company would make interesting reading."

The miracle is that throughout such a morass of misundertanding, airBaltic planes continue to fly their routes unhindered, and anyone who's flown into Riga on both Ryanair and airBaltic will hope that continues to be the case. In the air and the boardroom, airBaltic always seems to provide an interesting ride.