BAS keeps government waiting on airBaltic solution

  • 2011-09-28
  • Staff and wire reports

GROUNDED: AirBaltic minority shareholder Andrey Rudeshko warns that without more money, the airline will shut down.

RIGA - The most important question, and one which is not discussed much, is not about the ownership of Latvia’s national airline airBaltic, but about whether it is being properly and efficiently managed by its current management team. Board chairman Vadims Jerosenko (Harmony Center) of the financial consulting firm Laika Stars says that this is one of the key issues that needs to be attended to, reports

He also believes that the most important condition when deciding about the airline’s future is to maintain Riga International Airport as the airline’s base, something which the current president-in-hiding, Bertolt Flick, has suggested be moved to Vilnius.
According to Jerosenko, the Riga airport should remain as the airline’s base for at least 25 years. The airline’s base is used to estimate the airport’s transit flow, which is important for Latvia’s economy. In addition, the airline’s presence in Riga ensures “comfort” to those Latvian residents who are using the flights, helps to develop the airport, attracts transit passengers, and develops Latvia’s tourism sector, says Jerosenko.

If the state decides to set up another airline, he adds that Riga should be its base too, though setting up another airline from scratch would involve purchasing, or leasing, new planes, establishing a new brand, negotiating routes, etc., he cautions.
The Latvian government had still not received all of the information it had previously requested from airBaltic management before the Sept. 27 Cabinet meeting, which has led to further delays in making a specific decision on the airline’s future.
Even though airBaltic’s private shareholder, Baltijas Aviacijas Sistemas (BAS), previously announced that it has submitted all the necessary information to the government, the Cabinet of Ministers claims it has not received a bank guarantee on the funds allocated by BAS needed to increase the airline’s share capital, an audit report on the airline’s financial situation, proof that the airline’s president Bertolt Flick has left the company’s management, as well as other information previously requested.
On Sept. 26, Andrey Rudeshko, the airline’s minority shareholder representative - and Bahama registered Taurus Asset Management owner - said that the shareholders of airBaltic “have almost reached agreement on increasing the airline’s share capital and bailing it out.

He said that this agreement was made last Friday in Riga between him and representatives from the government’s consultant firm, Prudentia. Rudeshko said that a total of 100 million lats (142.8 million euros) is needed to be invested in the airline’s share capital, with both shareholders investing 50 million lats each, to keep it flying.
Rudeshko arrived in Riga on Sept. 21 for talks with the Latvian government in the dispute over the future of airBaltic, reported Bloomberg. Taurus owns 50 percent in BAS, Flick the rest. Rudeshko, who is also a partner at FinEkspertiza, arrived in Latvia after the government demanded to know who the ultimate beneficial owners of BAS are.

Flick said on Monday in an interview with Latvian State Radio that banks have agreed to underwrite the BAS investment in the share capital. In the interview, recorded in Germany, Flick explained that banks have already signed the guarantee documents for the government, whilst BAS representative (and the supposedly ‘true beneficiary’) Andrey Rudeshko, were to sign them.
Flick claimed that the documents, signed by the banks, have been sent to the government.
He then went on to say that the Cabinet has been postponing decisions on the airline’s share capital increase for the past six months. That is why the airline “turned to Riga District Court with an application for legal protection proceedings,” he said. During the proceedings, the court can rule that the airline’s share capital must be increased.

BAS is not sure why the government is hesitating with taking a decision on increasing the share capital. The company previously agreed to the government’s conditions, it said. BAS hoped that the Cabinet would make the necessary decision during a session after the 11th Saeima elections, but it did not happen.
The government has been saying that BAS hasn’t yet taken action on the agreed conditions, one being that Flick has to step down from running the airline. It also wants an explanation on where the money has gone that has been invested in the airline, such as the 15 million lats’ recapitalization last year, and that it is still waiting to receive an audited financial report for last year’s operations.

With the clock ticking, Sept. 26 was the last day for Rudeshko to decide on whether to invest the 50 million lats into the share capital. He said that he has the necessary funds, though was still waiting “to decide whether he is prepared to invest these funds into the airline.”

Rudeshko went on to explain that airBaltic requires swift decisions, otherwise, already at the end of September or at the beginning of October, “unpleasant incidents” are expected, when the airline’s planes will stop flying.
He adds that the airline’s losses can be explained by volcanic activity in Iceland, expensive fuel, non-economic airplanes, and an inability to increase its ticket prices. “The problems are understandable. However, if the shareholders fulfill their financial commitments, then the airline will be able to exist and compete for a serious market share,” emphasizes Rudeshko, but without giving any specific plans where the company will confront these competitive issues, and where the 100 million lats will go.

After escalating losses - up to 95 million lats over the past 3 years, says Prudentia - the financial situation at airBaltic could stabilize in 2013; afterwards, the airline will operate with profit, predicts the businessman. This, however, doesn’t come with a guarantee.
At the same time, Prudentia partner and council member Girts Rungainis told Delovije Vesti that the necessary agreements on the airline’s share capital increase can be signed swiftly, if needed. However, the actual payment can be transferred within a month or a slightly longer period.
Commenting on whether Prudentia is certain that Rudeshko is the actual beneficiary, Rungainis emphasizes that it can be verified, which is usually done by market supervisors.

Rungainis believes that the bailout and share capital increase is “the most acceptable solution.”
If, however, the airline is losing millions of lats on poor operating results, which may be the case, then new investment, without a realistic and viable restructuring plan, will not solve anything, and lead to continuing losses of state - taxpayer - money.
Though Iceland’s volcano has cooled down, continuing high fuel prices, a competitive market where price increases are virtually impossible, and new and more economic planes that will need substantial capital to acquire, are all obstacles to simply promising that the situation can be turned around just by pouring more money into it.

In what may be a flanking move by Flick to avoid being removed from office, airBaltic on Sept. 27 says it has submitted all the required documents to apply for legal protection from the government’s demands. If the court sides with Flick, it will allow him to continue running the airline until the court decides on further actions.
The airline’s president has also denied rumors that he is just managing the investments of the influential businessman Andris Skele. Flick said that his recent meeting with Skele and his financier, Harijs Krongorns, in the Ukrainian capital Kiev was “accidental.”

Flick rejected any criticism about leading the airline to its complicated and disastrous financial state. He explained that when he took over the airline’s management, it was a small airline with five planes, carrying 200,000 passengers per year. Ten years have passed and airBaltic has 34 planes, transporting 3.5 million passengers a year. It has become the leading airline in the Baltic States.

The growth, of course, has been built on continued capital investments by the shareholders.
AirBaltic’s financial problems, says Flick, can be explained by, for example, a twofold increase in fuel prices since 2009. He also claimed the government has always had all the necessary information about airBaltic. Commenting on his own mistakes, Flick pointed out that, perhaps, he should have slowed down the airline’s development.
His ego has driven growth in passenger numbers, but not profits for the airline, or dividends to shareholders.
Not surprisingly, he’s expressed no valid forward plan for the airline, and it continues to lose substantial amounts of money, and is essentially on life support from the government.

Prime Minister Valdis Dombrovskis said on Sept. 26 that the Latvian government is still prepared to invest in airBaltic if the necessary requirements are carried out. He announced that talks are continuing with Rudeshko, organized by the Transport Ministry in tandem with the government’s financial consultant Prudentia.
Dombrovskis rejected reports that the government wants to “torpedo” the airline. He pointed out that the government over a month ago made a decision on how to bail out airBaltic, however, this process is being hampered by Flick.
As for investing in airBaltic, he explained that this will occur as soon as “several requirements are completed.”

The state was said last week to be seriously considering establishing a new airline, therefore talks with potential investors are already taking place, claimed Prudentia CEO Karlis Krastins on Sept. 22. Krastins could not say how much money would be required, but pointed out that the government right now is in a situation where it has to cover airBaltic’s former and existing losses, and moreover, it has to deal with the management “spider web” set up by Flick. Besides, it is more than likely that the airline’s other shareholder - BAS - has zero resources and cannot invest in airBaltic’s share capital. Therefore, a new airline is a “logical solution.”

There is plenty of loose talk, of “starting up a new airline,” and “logical solutions” that may not be so logical or well-thought-out, not fully considering all the money invested so far and a strong brand (though showing heavy losses) and other assets built up, of incompetent management amid allegations of corruption, and audits that may show worse problems with the cash flows and possible accounting tricks under Flick’s command.

Coming up to its deadline, behind a closed door Cabinet meeting on Sept. 27, as this paper was going to press, the government agreed to allocate 57.6 million lats to increase the share capital of airBaltic. If the minority shareholder fulfills its conditions, Transport Minister Uldis Augulis (Union of Greens and Farmers) has been given the authority to sign such an agreement, said the prime minister.

On Sept. 29, a shareholders meeting is to be held, during which decisions on increasing the airline’s share capital will most likely be made, as well as changes to the airline’s board and council, as well as to the shareholders’ agreement.
SAS and Flybe Nordic are pursuing aggressive development policies in the Baltic countries, therefore preservation of national airlines in the region is of crucial importance, former airBaltic commercial director, now Estonian Air President Tero Taskila said in an interview with business daily Dienas Bizness on Sept. 26.

Taskila predicts major changes in the Baltic aviation industry because Finnair too has announced that it would pursue a much more aggressive policy in the Baltic countries in the future. The activity of low-cost carriers Wizz Air and Ryanair is also on the rise. The Baltics will be a region with very tough competition.

AirBaltic’s shareholders need to finally come to agreement and get on with fixing its problems. If it ultimately fails, however, there is a market in Riga that needs reliable airline service, and a highly competitive industry can be expected to rush in to fill it.