RIGA - Since the Baltic states joined the EU, the airline market has gone from strong to stronger. The opening of national borders and media awareness generated by EU accession have led to a record number of passengers. Estonian Air's customer count grew 31 percent in 2004, while Lithuanian Airlines' soared 41 percent.
Latvia's airBaltic, however, set the record with a staggering 75 percent increase. As Bertolt Flick, company president, says, "The Baltics have seen strong economic growth, an increase in foreign business and tourism and growth in local purchasing power. EU entry has been a very positive experience."
However, it has also led to soaring competition. First to take advantage of the change was airBaltic, which began using Vilnius as a second hub in June 2004. Within six months, low-cost airlines RyanAir and EasyJet began operations in Riga and Tallinn. Even Lithuanian Airlines (LAL) began sending charter flights through Riga, and CSA Czech Airlines is opening a new route from Riga to Rome.
"EU entry has created the opportunity to expand. We have taken it, but so has everyone else," says Giedrius Sniukas, LAL's PR officer.
Every airline in the region has opened flights to new locations, and with the number of carriers offering more customer choices than ever before, this looks like a perfect example of what EU expansion was meant to achieve.
Risks, rewards
Thus far the region's biggest success has been airBaltic. It has achieved remarkable growth both in Riga and its new hub, Vilnius. "We're firmly established in Vilnius, second only to LAL, and we're at the beginning of strong development," says Flick.
In 2004 the company leapfrogged Estonian Air to become the Baltics' biggest airline. It is now upgrading its fleet, phasing out three Avro RJ-70s to obtain its seventh Boeing 737-500. In March airBaltic will launch flights from Riga to Barcelona and Istanbul, the first Baltic airline to do so. "Pre-bookings for Istanbul are very good, while the numbers for Barcelona are just great," the CEO says.
However, the expansion implies a concomitant risk. While passenger numbers have soared, so has the number of available flights. Combined with an increase in fleet capacity, this means that the average seat occupancy fell from 61 percent in 2003 to 51 percent in 2004, a figure which, as CSA's Baltic manager Pavel Sarf puts it, "won't keep you alive for very long." This is airBaltic's gamble: if occupancy figures do not improve, they may find themselves overstretched.
So far, however, the gamble seems to be paying off. January's figures showed a 105 percent increase in passenger numbers year-on-year. Equally important, seat occupancy rose from 47 percent to 50 percent. While that may sound insignificant, it brings the airline close to its 53 percent figure in January 2003 's the year airBaltic made a profit.
"This year we won't be looking so much at new destinations, rather increased flight frequency," says Flick.
While the rate of expansion inevitably leaves airBaltic more exposed to possible downturns than its neighbors, the future looks promising.
Estonian Air, meanwhile, has also seen rapid growth, with passenger numbers up 31 percent in 2004. It also enlarged its network, though only by four routes. Though less dramatic, the expansion has meant a less dramatic downturn in seat occupancy: 58 percent in 2004 compared with 59 percent in 2003.
But there are signs that management wants more aggressive growth. In February 2005 Estonian Air decided to close its route to Gothenburg having opened it in June 2004, citing "unsatisfactory demand" and "weak growth potential." In January 2005, CEO Erki Urva stepped down despite expectations that the company had made a profit.
Lithuanian Air, which is still wholly owned by the state, has so far lagged behind its neighbors. Passenger numbers increased by 41 percent last year to 442,000, but the total figure is significantly smaller than Estonian Air's or airBaltic's. The carrier flies to fewer destinations than its neighbors and has added to them more slowly. This, however, seems about to change. The Lithuanian state plans to privatize LAL this year, and private investment is expected to lead to dynamic expansion.
Competition is key
Foreign airlines, meanwhile, are expanding fast. Low-cost carrier Ryanair carried 53,000 passengers to Riga in its first two months of operations, about half airBaltic's total for the same period. But Flick remains confident, claiming that "the increase in [low-cost] competition has not hurt our London flight."
Lotta Lindquist-Brosjo, RyanAir's Nordic and Baltic manager, points out that the airline is currently negotiating with over 50 airports across Europe, and calls Latvia a "very interesting market with potential for more growth." Ryanair has already opened a new route from Riga to Stockholm Skavsta, and while this does not compete directly with airBaltic's flight to Stockholm Arlanda, any broadening of the low-cost carriers' network can only increase pressure in an already pressurized sector.
A further factor is the EU itself. While EU rules governing passenger compensation are arguably in consumers' interests, the European Parliament is now reviewing a proposal to impose a special tax on jet fuel. But this, at a time when oil prices are higher than ever before, swelling fuel bills from 10 to 20 percent of total costs, seems perverse. It is to be hoped that EU parliamentarians will heed the lessons of their own Open Skies policy and not burden the industry at an already difficult time.
In the final analysis, the big winner of the airlines battle will be the consumer. Classic and low-cost carriers are also expanding their presence here, with Lotta Lindquist-Brosjo calculating that the low-cost airlines could eventually take more than 20 percent of European air traffic, up from the current 15 percent. Many factors could influence future development, and the most profitable airline remains to be seen, but the trend for ever-increasing destinations and ever-decreasing prices seems unlikely to reverse whatever the outcome. The strongest argument for the EU's single market has always been the consumer benefits of competition. In the airline market, at least, it looks set to deliver on that promise.
