Government finally acts to save airBaltic

RIGA - AirBaltic’s shareholders came together to agree on further investment in an effort to save the airline, which finds itself on the ropes due to difficult market conditions and poor management decisions. Both the Latvian government and Baltic Aviation Systems (BAS) agreed that the previous shareholders’ agreement, which was against the state’s interests, will be terminated, and that both partners collectively will inject 100 million lats (142.8 million euros) into the airline, reports delfi.lv.
The state will ultimately put in 57.6 million lats, some of which will be in the form of convertible debt – the money will be loaned to the airline with the possibility for some of it to be exchanged for equity. The investment by the minority shareholder will be proportionate to its stake in the airline.

This cash infusion will be used to cover operating losses, and to develop the company so as to be able to stand on its own feet. Part of the investment will go towards modernizing the aircraft fleet.
It was on Monday evening when the partners sat down to sign the agreement. The Transport Ministry emphasized that the state now exercises control of the company.

Signers at the meeting included Transport Minister Uldis Augulis (Union of Farmers and Greens), BAS, and creditors Latvia’s Krajbank, Snoras Bank, Investbank, Taurus Asset Management Fund, Transatlantic Holdings, and KD Jet.
It was Transatlantic Holdings that purchased the 59,110 unregistered shares in the company in a secret deal intended to gain influence over the company. The company is connected to Russian billionaire Vladimir Antonov’s businesses, which own 45 percent of Snoras Bank.

The Bahamas-registered Taurus Asset Management Fund, owned by Russian financier Andrey Rudeshko, controls 50 percent of BAS.
KD Jet, which is located in the same building as other airBaltic daughter companies, may be connected with BAS-owned North Hub Services.
The Latvian government will have to pay in 16 million lats by Oct. 14, according to the deal, once conditions are met: former airBaltic President Bertolt Flick’s petition to the court for legal protection has to be withdrawn; a reversal of the deal involving the 59,110 unregistered shares; rewriting the company’s statutes.

Connected with the agreement, airBaltic will have a new council and management board. Flick, who has run the airline as his personal fiefdom these last few years, seemingly unaccountable to anyone, resigned on Tuesday.
The airBaltic brand, which was put up as collateral for a loan from BAS, will also have to be returned.
Consolidation of BAS and airBaltic are required under the new agreement, including services that, under Flick, were outsourced from the airline to his own companies.

Within two months a restructuring and business plan must be delivered.
Considering accounting irregularities that have been uncovered recently by state consultant Prudentia, a review of the existing auditing firm should also be undertaken, with the possibility kept open of replacing it. As Prudentia has pointed out, according to un-audited data, the airline’s losses from Jan. 1, 2008 to June 30, 2011 amounted to 95 million lats. The government has previously complained of not knowing where the money was going.

Transport Ministry State Secretary Anrijs Matiss said that no candidates for work on the board had been nominated as yet, reports Nozare.lv. Several prospective candidates have been approached, he said, but they have not yet accepted the offer.
The daily Diena previously wrote that the new board could include the airline’s chief operations officer, Laila Odina, or chief financial officer Martins Antonovics. Matiss did not deny that a new head could be appointed for airBaltic already this week.
Flick also participated in the airBaltic shareholders meeting held on Sept. 29 through a videoconferencing hookup to inform the shareholders about the current situation in the airline. According to him, the situation is “satisfactory,” said Matiss. “Mr. Flick did not speak of any risks in the near future.”

Nonetheless, the events over the past few weeks and months have had a negative impact on the brand, warned Starcom media agency director Davids Stebelis. He believes that the airBaltic saga will have international consequences, since companies that are involved in legal proceedings against the state are frequently no longer considered reliable cooperation partners. Therefore, airBaltic issues will affect the airline’s reputation not only among its current partners, but also among prospective cooperation partners in Europe and the world.

“A product’s value is determined by consumers. AirBaltic is no exception. The airline’s financial problems have caused much inconvenience to many of its customers, resulting in cancelled flights and direct or indirect losses. AirBaltic’s brand has lost part of its value among the customers,” explained the expert.

Stebelis emphasized that public opinion about the airline has also changed. So far, airBaltic provided flights without delays, whilst, at the moment, the airline cannot guarantee even tomorrow’s flights. The loss of trust negatively affects the airline’s reputation, which is an integral part of the brand’s value.
It’s not getting any easier to run an airline, either. Many airlines “will experience hard times in the near future, and the reason is slower growth, reduced economies and higher fuel costs,” said Mike Rutter, CEO for the Flybe airline, in an interview with Diena.

Flybe successor Flybe Nordic, jointly owned by Flybe and the Finnish airline Finnair, is slowly becoming a competitor for airBaltic. In July, Finnair acquired Finnish Commuter Airlines (also known as Finncom) for 25 million euros and named the new joint venture Flybe Nordic. One of the airline’s target markets is the Baltic States, says Rutter.
Commenting on the future of the European aviation industry, he emphasizes that it will experience “significant consolidation processes, which will be more serious than over the past few decades.”

The government has also started talk of an exit plan for itself. AirBaltic shares could be listed on the Riga Stock Exchange already in 2014, Matiss said in an interview with Latvian State Radio on Sept. 28. He added that the state should not be managing an airline business. When the financial situation at airBaltic stabilizes, it will be necessary to attract a strategic investor to develop the airline’s routes and fleet.
According to European Union regulations, for the airline to maintain its status as the national airline, the given EU member state or its citizens must have “effective control over the airline.”

Commenting on finances after the share capital increase, Matiss pointed out that, first of all, the airline has still not settled its debts with various suppliers, airports and leasing companies. Secondly, the investment will be used to modernize the airline’s fleet. In November, the airline will stop using Fokker airplanes and acquire new planes on lease. The first installment for the ten new planes could amount to 10 million lats.
He confirmed that the airline still intends to lay off 200-250 employees, who are currently servicing the Fokkers. Some of them could be retrained to service the new planes.

Regarding Flick’s forecasts that the airline will operate fewer flights already this autumn, Matiss pointed out that air transportation is a seasonal business and, due to several “objective” reasons, there are fewer passengers in winter. The airline could also optimize its routes, which was one of the main reasons for its losses, he says.
Matiss, however, disagrees with Flick about the need for a new airport terminal. The ministry representative says that the airport has excellent business ideas, which will still be developed in the future. The new terminal is also important due to Latvia’s 2015 EU presidency, when the number of passengers will increase. The decision to build a new terminal for one event, even if it lasts for one year, would also have to be based on solid, long-term forecasts, and not on hope.

It took a crisis of existential proportions for airBaltic’s shareholders to sit down at the same table and come to agreement.  President Andris Berzins on the LNT morning show ‘900 sekundes’ last week said that the situation should have been solved much earlier. He claimed that it is not normal that shareholders cannot solve the airline’s issues, but instead that the talks have to be held with the help of third parties.

The two sides (and numerous bit players) seem to have come to agreement – and substantial penalties await if conditions are not met. The chaos surrounding the airline, it’s former president, shareholder indecision, has caused substantial damage to the brand, as well as to taxpayer wallets. Work lies ahead to rebuild this people-carrier, though it needs to be done in a more intelligent way and with an eye towards profit – for the shareholders. In the end, “the airline’s reputation is the main priority. It must be restored,” stressed Stebelis.