Hard landing for airBaltic

RIGA - Economy Minister Artis Kampars’ (Unity) sharp criticism earlier this year of the situation at airBaltic has resulted in losses of over 25 million lats (35.7 million euros), Transport Minister Uldis Augulis (Greens/Farmers Union) declared at a press conference on Aug. 22, reports news agency LETA. The patience of creditors began wearing thin after his negative remarks, and put a major dent in ticket sales - minus 70,000 alone, causing about 5 million lats in losses, Augulis claimed.

Over 20 million lats in losses were due to the changes in guidelines for the acquisition of airplanes, he adds in accusations.
Augulis said that even though Kampars has repeatedly declared that airBaltic is a matter for the transport minister to deal with, he continued his comments and refuses to retract the statements made in June that the airline is on the verge of bankruptcy.
There may be some truth to these assertions.

AirBaltic, Latvia’s national airline that’s majority-owned by the state, will need fresh capital following a loss of about 34.2 million lats last year, reports Bloomberg. The airline’s financial situation is “serious,” the transport ministry said on Aug. 17. The Latvian airline has the lowest core capital ratio of all European airlines and needs cash to continue to operate and develop, it said.

The company’s supervisory council on Aug. 16 called for a recapitalization of at least 60 million lats, according to the ministry.
Latvian Prime Minister Valdis Dombrovskis (Unity) said it was difficult to support recapitalization without knowing what happened to 15 million lats the state invested in the company’s capital previously. Transport Minister Augulis’ suitability for his position will be reviewed if the company’s shareholder agreement isn’t revised and the finances solved, Dombrovskis warned.
The previous increase in Latvia’s national airline share capital, 30 million lats, of which 15.6 million lats were in the state’s shares, was used to cover a long-standing debt to SAS, the president of the airline, Bertolt Flick, who is managing the airline from his Berlin, Germany headquarters, said in an interview with the daily Diena.

“Both stockholders - not only the state - invested 30 million lats in the company in total last year. But the company paid 31 million lats to SAS for an old debt. Therefore, this stockholder jointly-invested sum was not even enough to pay previous debts to SAS,” Flick says in the interview.
As Diena reported back then, airBaltic has neither publicly explained the poor results of 2008, nor how it plans to work with the pledged profits of 2009.

It was publicly pointed out then that the biggest airBaltic creditor is the former co-owner, SAS, that in 2008 sold its stock to Flick for 14 million lats when the government refused preemption rights. The debt to SAS in the report is 29.2 million lats (33 million lats were mentioned in the takeover).

“How the debt came to be is a good question,” a source familiar with the situation said. He made an assumption that the unfavorable fuel agreements that Flick states as the reason for losses were succeeded by him from SAS. They did not pay for fuel, so the debt incurred. SAS declined to comment to Diena on the advent of the debt as well as negotiations with Flick about their repayment schedule, therefore this version cannot be verified.

According to LETA, in the summer of 2009 the government decided on an investment in airBaltic capital, implying the losses of 2008 as the reason, but later, after the government’s decision, Kaspars Gerhards, then the minister of transport, explained that it was decided to increase the stock capital to divert the invested funds to the company’s development projects, for example, acquisition of new airplanes by leasing and to cover credit facilities.
The decision to increase the stock capital was made based on Flick’s prognosis that airBaltic profits in 2009 could reach 12 million lats, which would be invested in the capital. Flick also was supposed to hand in the company’s plan of action to the government.

The company’s profits in 2009 were 14 million lats, but the airline’s brand and its related trademarks were sold off to Baltic Aviation Systems Ltd., whose owner is Flick. According to the 2009 audit report, they were evaluated as worth 13 million euros. The sold trademarks were airBaltic, airBaltic.com, airBaltic Travel.com, airBaltic Hotels, Baltic Miles, and Baltic Taxi. Later they were bonded.

Now, however, Transport Minister Augulis says that the 34.2 million lats in losses suffered by the airline last year are due to an insufficient amount of share capital.
This, though, is a doubtful excuse, as the problem at the airline is that it is experiencing operating losses, not financing problems, under Flick’s management. Additional share capital won’t solve poor management or eliminate continued losses. Share capital refers to something else - proper financing, such as for purchasing new planes to develop more routes - and insufficient capital can be satisfied through additional investment (more equity, or debt) into the airline.
But throwing more state money down a black hole won’t solve the problems in the company if it is incompetently running daily operations and losing money.

Nonetheless, Augulis continues to argue that the airline’s share capital is currently a bit over 500,000 lats - on a 270 million lats turnover. “No such company exists with such a huge turnover and such share capital. The losses prove that the company cannot develop without normal share capital,” he believes.
In addition to the confusion, Flick did not once warn the airline’s majority shareholder - the Latvian state - about the huge losses the airline was piling up last year, said Gerhards said.

According to the former transport minister, the airline’s board had many opportunities to inform the airline’s majority shareholder of its financial problems. “Last March, the airline’s board presented a business plan which projected profit and the company’s development in 2010,” Gerhards explained. He went on to say that with the state’s 15.6 million lats investment in the company’s share capital last year, the airline said that these funds would help the company develop by purchasing eight new Bombardier aircraft.

“In 2009, the company operated with a profit, and there was no evidence last year that airBaltic was going through such financial difficulties. At least we did not receive any such information from the airline’s representatives,” he emphasized.
Prime Minister Dombrovskis has signed a resolution for Augulis, listing tasks to be done regarding the airline. Dombrovskis explains that these tasks and documents were previously mentioned and include the audited report on the airline’s operations in 2010 and a protocol decision so that the government could decide on its further action.
The Cabinet will have to increase the share capital of airBaltic, otherwise the airline will not be able to operate, said Kampars on Aug. 18. However, at first, the government will have to alter the airBaltic shareholder agreement or even draft a new one, he added.

Kampars pointed out that the state is interested in the airline’s successful operation and is not considering selling its shares.
The minister did not specify the required investment in airBaltic, but emphasized that it is also necessary to attract a new and reliable investor. However, at first, the airline’s management must be changed and a new shareholder agreement be drafted. AirBaltic could even operate without one, in compliance with the Commercial Law.

AirBaltic’s President Flick is now attempting to blame the prime minister, even though he himself is responsible for the airline’s losses over the past three years, says Kampars. “One thing is clear, without the airline’s share capital increase, airBaltic will not be able to operate, since the current management, unfortunately, has spent the previously invested capital in an unknown direction. If we want to maintain the airline, the government has no other choice but to invest in it. However, the government should not invest while airBaltic is led by the current management, which made these grave mistakes, and while the airBaltic shareholder agreement still includes such humiliating terms for the state,” pointed out Kampars.

He said that the new shareholder agreement should stipulate that the state, as the airline’s majority shareholder, is represented in its board and is not restricted in the use of its capital. Kampars is certain that the airline will continue to operate, but not according to the current model.
On Aug. 24, Dombrovskis announced that if Flick remains at the head of the airline, then the state won’t participate in further financial stabilization efforts.

The Latvian state owns 52.6 percent of airBaltic while Baltic Aviation Systems has 47.2 percent.