Flick in hot water again

RIGA - The Latvian national airline airBaltic has to pay Baltijas aviacijas sistemas more than 1 million lats (1.4 million euros) a year in order to use its own airBaltic brand. Or so this would have been the current payment due under an agreement made last December in which Air Baltic Corporation (airBaltic) sold the airBaltic brand and all related trademarks to Baltijas aviacijas sistemas, a company owned by airBaltic President Bertolt Flick, for 13 million euros, reports Nozare.lv.
In the uproar this deal has caused, Flick in an interview on Aug. 10 with the LNT show 900 Seconds said that the sale of the airline’s brand was discussed with Transport Minister Kaspars Gerhards on at least three occasions before being decided on by the company’s council.

“The minister supported the deal,” said Flick, adding that the talks had taken place in the presence of Transport Ministry State Secretary Anrijs Matiss. Flick also stressed that, according to the sale agreement, airBaltic could repurchase the brand at any time, and that the deal was concluded in order to improve the company’s figures.
Joining into the fracas was Prime Minister Valdis Dombrovskis (New Era), who ordered an investigation into the sale of the airBaltic trademark on Aug. 5. Dombrovskis signed a resolution for Transport Minister Kaspars Gerhards (For Fatherland and Freedom/LNNK) instructing the Transport Ministry, as the state’s shareholder in airBaltic, to evaluate whether the action of the airline’s board and council members who were in office at the time of the deal was in conformity with their legally defined duties.

If it is established that members of the board or council have violated the Commercial Law, the transport minister will be instructed to carry out the necessary actions for raising a claim against these persons, said the prime minister’s order.
In what seems extremely unprofessional, or incompetent, in the whole matter concerning members of the company’s board, it was reported that the council had not even discussed the amount of payments that would be required to Baltijas avijacijas sistemas for using the airline’s brand. This is despite knowing that when the brand was sold, such payments would be necessary, commented airBaltic Council Chairman Vigo Legzdins on Aug. 4.

“It was known at the time that a payment would be necessary for use of the brand; however, the talk was of a reasonable usage fee, as this payment was not presented as a huge expense,” explained Legzdins.
He conceded that the council’s decision on the sale of the brand was taken without knowing the details, as “matters of a commercial nature are not the council’s area of competency.” Moreover, at the time the decision was made, the possible situation was discussed that “this could be a repurchase agreement, and not a sale and licensing agreement.” The council’s support for the deal was unanimous, and the commercial details were worked out afterwards in discussions between the company’s management and the buyer.

Asked whether payment for use of the brand could have ended up being larger than the sum of the deal, Legzdins answered that in such a case, it would be necessary to ask “many and painful questions to the company’s management.”
“This deal has not reduced the value of the holdings of any of our shareholders,” claimed Legzdins, adding that the value of the brand had been calculated by the Lithuanian office of the international auditor Ernest & Young. “I believe that if a private shareholder is ready to invest resources in the company, working in the company’s interests, this is a very good sign. It means that he believes in the company’s future. Remember that the deal took place at a time when airBaltic had experienced significant losses in 2008, the previous year.

Legzdins also claimed that the decision to sell the brand to Flick’s company was taken in order to attract capital for the stabilization of the financial situation and for future development of the airline.
Economy Minister Artis Kampars (New Era) was infuriated at the deal and promised to do everything possible to annul the sale of the brand. The minister said that Flick used shameless means to gain ownership of the airline’s most significant asset, and as such has reduced the airline’s value.

“The deal unequivocally shows that Flick has acted in his own, rather than the company’s interest. This deal has reduced the value of airBaltic as a company,” said an indignant Kampars.
Dombrovskis noted that Flick would justify the sale of the brand as an effort to attract additional financing. AirBaltic representative Janis Vanags told business daily Dienas bizness that the sale brought in necessary financing at a time when the airline had insufficient capital.

According to the airline’s 2009 annual report, the company’s brand was assessed and certified at 13 million euros. The report also indicates that the airline must make monthly payments to Baltijas aviacijas sistemas, for use of the brand and trademarks, which include airBaltic.com, airBaltic Travel.com, airBaltic Hotels, Baltic Miles, and Baltic Taxi.
Experts were divided in their opinions as to the effect of the deal on the value of state investments in airBaltic. Investment bank Prudentia partner Girts Rungainis indicated that: “If a trademark is worth more but is sold at a lower price, the state will of course lose share value. Secondly, this makes the sale of state capital more difficult, as the state no longer controls a significant asset.”

Rungainis also indicated that with the airline’s brand coming under the control of Baltijas aviacijas sistemas, future potential buyers could find a situation where it is necessary to buy not just airBaltic, but also Baltijas aviacijas sistemas.
The result of all this commotion was that on Aug. 5, Flick and Gerhards reached agreement on the return of the airBaltic trademark to the airline. The minister said that this will restore his confidence in Flick, nevertheless, a new council that will be elected for the airline will also appraise the performance of Flick as the president of airBaltic.
Although the state is a majority shareholder in airBaltic, the airline’s management is left to the private shareholder, Gerhards noted.

In an understatement, Gerhards said he believes that the current council did not sufficiently evaluate all aspects of selling the trademark to Flick. Nonetheless, Gerhards said after his meeting with Flick that he and Flick had agreed that the trademark must remain the airline’s property and returning the trademark to the airline would be the first step for Flick to regain society’s trust.

The Transport Ministry will recall its representatives from the airBaltic council, and a new council will be elected for the airline at a shareholders meeting in the near future.
In a sign of warming relations between the two, Gerhards pointed out that the aggressive marketing and expansion tactics employed by Flick most probably contributed to the airline’s growth and development.
Flick, however, believes that much of the discussion is due to the upcoming Saeima elections. “We are moving closer to the elections, and a scandal is in someone’s interests,” said Flick, indicating that the members of the airline’s council were innocent in the matter, as “everything was known, and everyone supported it.”

Baltijas aviacijas sistemas’ consolidated annual report for 2009 shows not only huge loans taken on in order to provide funds for Flick’s acquisition of airBaltic shares, but also the intention to acquire income from the airline for the use of the airBaltic brand.

Baltijas aviacijas sistemas controls 47.2 percent of airBaltic, with the Latvian government holding the balance.
AirBaltic’s annual report indicates that the company was paying a variable monthly license fee for the use of its airBaltic and airBaltic.com trademarks; with this monthly fee reaching 95,000 lats and more, Baltijas aviacijas sistemas would have received at least 1.1 million lats a year from the deal. It is therefore possible that since the start of 2010, the airline has already made payments of 700,000 lats for the brand, and that this money will now have to be returned.