RIGA - Latvia’s Transport Ministry has received an offer from Baltijas Aviacijas Sistemas (BAS), which is the private minority shareholder of Latvian national airline airBaltic, for the state to buy its shares in the airline for a price of just under 91 million lats (130 million euros), reports LETA.
Last week, the government decided to take part in bailing out the money-losing air carrier, stipulating though that a change of company management is one of the main conditions, Transport Minister Uldis Augulis (Greens/Farmers Union) said after a government session.
According to the decision, the government has agreed to invest 33.5 million lats into the airline.
Consulting firm Prudentia was given two weeks to evaluate how the state could participate in the further development of the company. It will evaluate two scenarios, one in which the state participates as an equal, as the company’s second shareholder, or, one in which the state completely participates in all of the airline’s operations. According to the government, selling the state’s shares in airBaltic has not been recommended at this time.
Augulis explained that changes have to be made to the shareholders agreement so that the state would be able to influence more the airline’s decision making process. An agreement also has to be made so that Riga Airport remains the airline’s main hub, as airline President Bertolt Flick had earlier threatened to move headquarters to Vilnius.
If the airline’s minority shareholder does not agree to these conditions, the government will not be able to make the decision to bail out the airline. “All of the shareholders must understand that that majority shareholder has the right to put forward its conditions,” the minister said.
In what seem to be secret, back-room negotiations, on Aug. 22, a day before the Cabinet session to review the dire situation of the airline and to consider a capital increase, Flick was meeting with Saeima member Andris Skele (For a Good Latvia) and financier Harijs Krongorns in the Ukrainian capital Kiev, reported the magazine Ir.
The magazine points out that Ventspils Mayor Aivars Lembergs (For Latvia and Ventspils) was the one to reveal behind-the-scenes talk about the airline’s sale, when he announced that Prime Minister Valdis Dombrovskis (Unity) has discussed this with “some Ukrainian oligarchs.”
Dombrovskis’ former advisor on economic issues, Gints Freimanis, confirmed that, in early summer, Dombrovskis met with Ukraine’s Privatbank shareholders Ihor Kolomoyskyi and Henadiy Boholyubov, who were interested in investments in Latvia. During the meeting, both businessmen mentioned that they are interested in aviation and already hold shares in the Ukrainian airline Aeroswift. They also pointed out that they were speaking about airBaltic with Skele, who, at least publicly, has no connection to the airline.
Skele, however, denied discussing the airline’s sale with Kolomoyskyi and Boholyubov, and pointed out that he knows only one of them. The Saeima member also tried to explain that it was only “a coincidence” that he met Flick at the airport in Kiev.
Facing massive losses in a difficult aviation environment, the airline will cut spending by retiring ten Fokker 50-type airplanes, which will allow the company to save 30 million lats, it reports. The company will also lay off more than 200 employees, confirmed CEO Flick.
With the retirement of the Fokker 50s, airBaltic will operate larger aircraft more intensively, and at a lower per-seat cost. The number of seats available on flights from and to Europe, Scandinavia, the Middle East, Russia/CIS via Riga will be the same as in the previous winter.
“It means that we will also adjust our internal functions, as part of this cost-cutting exercise to save 30 million lats, for the benefit of our customers who want to fly at affordable prices. Regrettably this will also require us to reduce staff numbers by over 200,” Flick explained.
He said that today’s reality in the aviation industry - high fuel prices and relentless cost pressures - means that airBaltic cannot rest on its past achievements, and needs to make further improvements to its efficiency by modernizing the fleet and retiring ten aircraft earlier than originally planned.
“Low unit cost and affordable tickets for our passengers have been the focus of airBaltic for the past ten years,” Flick stressed. “By offering lower fares to leisure travelers and business people, airBaltic continues to demonstrate that passenger growth is possible in the Baltic markets and Scandinavia despite the recent recession; this strategy of affordable tickets to regional customers is today copied by new players in North Europe.”
A 63 million lats injection is necessary to keep the airline in the air; therefore, it must be decided whether the state will invest half of the sum, or if there has to be an additional issue of shares. If that will be done, the company can work for the rest of the year and auditors can give a conclusion about 2010 and future activity. The government must act without delay because borrowing would be very costly.
The problem seems to be, though, that it is poor management by Flick’s team that is at the root of the ongoing losses. The airline is losing money on an ‘operational’ basis. Additional share capital - more cash injections, as Flick wants - won’t solve incompetent management or eliminate continued losses on a daily basis.
As well, the state has to be aware that the increase of share capital from the state budget will significantly increase the budget deficit and will create a need for an additional fiscal consolidation, the Ministry of Finance (FM) believes.
While being aware that the Ministry of Transport (SM) continues to work on a solution to improve the situation, and assuming that the government will consider the question of additional state support for solving the situation, the FM believes that it would be admissible only based on precise calculations about the financial profitability of the investment, said FM Communication Department chief Aleksis Jarockis.
For a company established in 1995, airBaltic by now should be working at a profit, not heavy losses and continued state subsidies 16 years after getting started.
Any further support would be admissible either directly - with funding that the state would receive in dividends or as a result of the company’s share value increase, or indirectly with a different economic gain, that would be provided by the expansion of the tourism industry, for example, says Jarockis.
He pointed out that the SM has to arrange airBaltic corporate management issues and has to ensure a more qualitative observance of state interests.
It is clear now that the state can invest additional funding in the company, but only if the business deals in the airline are done according to the practice of good business management and are transparent, giving a possibility to follow the cash expenditure flow, as well as there has to be confidence about the full protection of state interests in the company.
Every investment from tax-payer money in the company’s share capital has to be evaluated in the context of state support regulation norms, added Jarockis, pointing out that before investing the tax-payer money, again, in the company’s capital, there has to be a clear confidence that the airBaltic management is ensured in accordance with good practice principles, as well as the full protection of the state interests is guaranteed.
The FM believes that the SM should view the increase of airBaltic share capital with state funding as a whole, namely, by also evaluating its influence on the further development of Riga Airport.
Bank of Latvia President Ilmars Rimsevics said on the Latvian State Radio talk show ‘Krustpunkta’ on Aug. 25 that he wants the government to draw up a “clear balance sheet” that would show the difference between the state’s investment in airBaltic and the airline’s sale.
Rimsevics believes that the Cabinet can make its decision on such a complicated matter only when “all numbers are on the table.”
The Bank of Latvia believes that the state is not the most successful manager of airBaltic.
Commenting on whether this is the best time to sell state assets, Rimsevics said that the state must consider its expenses in maintaining these assets.
“If the state is certain that it will not invest anything in these companies during the next three years, then sure, keep the assets; however, if there is uncertainty, then they should be sold,” explained Rimsevics.
Several well-known international companies have already inquired about the airline, Prudentia partner and board member, Girts Rungainis, said in an interview with Latvian Radio on Aug. 25. Rungainis declined to reveal the company names and said that it is up to the government to make a decision and announce it. He also added that it is possible to find a partner for cooperation in the airline.
According to Rungainis, airBaltic is one of the few success stories in Latvia, an internationally-recognized brand, the subject of Estonian and Lithuanian envy. The airline’s economic efficiency constitutes several percent of the country’s gross domestic product (GDP). If the airline stops operating or is interrupted, it will negatively affect the airport, which depends on the airline for 70-80 percent of business. The ticket prices would increase then, while the number of flights would go down.
The airline’s stabilization will require at least 100 million lats. Prudentia’s report will have to include whether it thinks after another 100 million lats in the airline, does airBaltic have a chance to finally stand on it’s own.
The daily Diena reports, however, that in taking over full control of the airline, the state could have to invest about 170 million lats into it. This would be the total investment by the state - purchasing the minority shareholder, covering the airline’s losses, and making additional, necessary investments.
Latvia owns 52.6 percent of shares. The company’s minority shareholder is Baltijas Aviacijas Sistemas, with 50 percent of this company owned by Flick.