Latvia's airBaltic lifts off again

By bne IntelliNews April 3, 2014

Mike Collier in Riga -

Airline turnarounds in Riga are usually just a matter of cleaning the seats, emptying the sick bags and re-stocking the trolley before the next stag party climbs aboard the flight. But Latvian flag carrier airBaltic has performed a far more impressive turnaround at corporate level, transforming itself from dodgily-run cash vortex into a profitable airline in less than three years – one full year ahead of schedule.

Releasing 2013's annual performance figures at Riga Airport on April 2, CEO Martin Gauss revealed airBaltic had achieved a net profit of €1m. That may not sound a lot, but considering the equivalent figure for 2012 was a €27m loss and 2011's terrifying €118m loss (with the state seizing control of the airline to stop its total collapse), it is a remarkable reversal of fortunes.

“The year 2013 will go down in airBaltic’s history as the one in which we proved that a turnaround is also possible in difficult years. We restructured through the application of cost controls, capacity management, and efficiency gains. We made this achievement a year ahead of the original schedule in our restructuring plan,” Gauss told journalists.

The interesting thing for students of balance sheets is that the improvement clearly did not just ride on the coattails of any major pickup in the aviation sector as a whole. Revenues were unchanged at €325m in both 2012 and 2013 and passenger numbers actually dipped from 3.08m to 2.95m - so it was indeed efficiency savings that did the trick with 5% better yields and RASK (revenue per available seat kilometre) up from 7.5 euro cents to 7.6 – a seemingly tiny but crucial improvement.

Speaking to bne immediately after the announcement, Gauss said it was too early to revise 2014's projections upwards, but dropped a hint that it would probably happen before too long: “We will not revise the 2014 for the moment as we are still early in the year, nevertheless our first two months that we have results for, are much better our original budget.”

“Our main focus is to offer proper air infrastructure for the Baltic region, so that leisure and business travellers can reach the main cities in Europe, Scandinavia and the CIS several times a day. The main strategy is to open up new destinations that offer a positive contribution towards our EBIT, and that is exactly what we have done this summer by offering Burgas and Varna in Bulgaria, Palma de Mallorca, Bucharest, Gothenburg and Aberdeen.”

Such destinations tell their own story too. Before Gauss' arrival the airline's focus was further east, opening routes to the Caucasus and Central Asia that seemed geared more towards a small number of business friends of the airline than the mass market.

With the European Commission due to rule soon on whether the Latvian government's saving of the airline was in line with competition law – and hopes are rising that the EC will find in the state's favour – the return to profitability is the best possible advertisement for the endgame Gauss was hired to play in late 2011: a sale of the airline.

“Several buyers are evaluating airBaltic for short-haul business in Europe, and definitely our positive result helps that process, however, I cannot disclose further details of that process,” Gauss said. With Etihad's landmark purchase of Serbia's JAT, the whispers in the departure hall are that the most likely buyer for airBaltic would be another Middle Eastern airline keen to spread its network across Northern Europe, with Qatar Airways frequently cropping up in speculation.

Good hire

If and when it does get the sale away, the Latvian government will also deserve some credit for choosing Gauss, a German, after enduring a decidedly sticky relationship with his compatriot and predecessor Bertolt Flick. In many ways Gauss is the polar opposite of Flick – soft-spoken and understated where Flick was fiery and confrontational, low-profile and private when stories of Flick's extra-curricular adventures were staples of the gossip columns.

But perhaps the most important difference is the simplest: Gauss and his team have had one plan, stuck to it and been open about its implementation, providing quarterly financial statements and press briefings. For all the razzmatazz of the Flick era, no one could even say with certainty who actually owned the various parts of the company, so wrapped up were they with oligarchs and offshoring.

With another iconic Latvian state-owned company, the Liepajas Metallurgs steel company, currently in receivership, the airBaltic turnaround provides a salutary reminder that even apparent basket-cases can be transformed if the management is right. Metallurgs actually is far from a basket case - it has some of the most modern equipment in Europe - but was run by people who were at best incompetent, with court cases set to decide if they were also criminally liable.

The government could do far worse than look for a metallurgical Gauss to take charge in Liepaja. As far as Gauss himself is concerned, the formula for a successful turnaround is relatively simple: “Here I have learned that for a successful turnaround you need a shareholder that is ready for such a journey, and an energetic team that implements a turnaround.”

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