Long-term state support expected for airBaltic

  • 2012-09-19
  • From wire reports

CROWDED SKIES: There are high hopes for a return to profitability, though long range forecasts are at best a guessing game.

RIGA - If a strategic investor is not found for Latvia’s national airline airBaltic, the airline will require an additional 96 million lats (137.1 million euros) from the state budget from 2013-2016 at the very least, according to part of the airBaltic ReShape restructuring plan documents that have not been released yet, but obtained by the investigative news portal Pietiek.com, reports Nozare.lv.

Even though it was previously announced that, according to the ReShape plan, airBaltic will return to profitability in 2014, the airline may be operating with losses in 2016 again.
ReShape was drafted and supplemented by investment banking company Prudentia. The plan was approved by the government during a closed session in March.

According to government, Transport Ministry and Prudentia representatives, ReShape envisages that the airline’s costs will be restructured and that it will return to profitability in 2014.
However, the portal believes that this is only part of the truth. Indeed, the plan envisages that airBaltic could conclude 2012 with 38 million lats in losses, 2013 with 16 million lats in losses, 2014 with 10 million lats in profit, 2015 with 9 million lats in profit, 2016 with 16 million lats in profit and 2017 with 4 million lats in profit.
Nevertheless, it has not been publicly mentioned that, according to the plan, airBaltic risks returning to losses post-2016, since the airline’s potential profit depends on external factors.

ReShape also clearly states that, in addition to the previously invested 67 million lats (a loan from the State Treasury), the airline will require an extra 96 million lats at the very least during the next three years.
It can be concluded from the plan that, if airBaltic fails to attract a strategic investor, the state may have to invest an additional 100 million lats in airBaltic, and the airline may not return to profitability.

Searching for buyers
Prudentia says it is currently continuing talks with all potential investors who previously expressed interest in purchasing airBaltic, Prudentia partner Karlis Krastins said in an interview with Nozare.lv. “So far, we have been open to proactive investor offers expressed previously. When the government regained control over the company, serious market players realized that airBaltic is in safe hands and its future can be discussed. All potential investors were heard out and are still being heard out, no serious investors have been turned down. However, their proposals have not fully developed so far,” said Krastins.

Talks were also held with Turkish Airlines. These talks still continue. There was also a visit to the Persian Gulf States in March, as well as meetings with three airlines - Qatar Airways, Ettihad and Emirates Airlines, explained Krastins.
“At the moment, it is necessary to take into account that Ettihad has become the largest Air Berlin shareholder, but airBaltic has signed a code-share agreement with Air Berlin,” said Krastins, adding that cooperation with Ettihad could continue.

In order to develop cooperation with Qatar Airways, Latvia and Qatar must sign a bilateral agreement on cooperation in aviation, said Krastins. The Transport Ministry is now actively working on the agreement that will most likely be signed by the end of the year.
During last week’s visit to China, talks were also held with China’s four largest airlines - Air China, China Southern, China Eastern and Hainan Airlines.
An advertisement placed in the European and British editions of the Financial Times by the Transport Ministry on Aug. 27 invited non-binding expressions of interest by Nov. 1 for a stake of up to 50 percent minus one share in airBaltic.

Wishful thinking
Prudentia partner Girts Rungainis, along with Krastins, in counting on an optimistic forecast coming true, said that the sale of the airline should not be rushed because, according to the airline’s business plan, its value will increase “significantly” by 2014 and more investors will be interested in the airline, investment banking company “ say in an interview with the “Nozare.lv” business potral.
At the moment, there are more airlines in Europe and the world that want to be sold, and fewer airlines willing to buy, explains Rungainis.

“Of course, from Latvia’s standpoint, finding an investor for airBaltic is closely associated with the airport and the development of the airport,” says Rungains, adding that previous co-owners and the management of airBaltic are still trying to influence the airline’s operations. They are also putting pressure on Prudentia, the government’s consultant, wanting that the airline be sold as soon as possible, so they could recover some of the money invested in the previous, unsuccessful business model of airBaltic.

AirBaltic’s aggressive expansion since the beginning of 2009 increased the airline’s losses as turnover was growing - it could have been a good model if the airline had significant financial resources, but it was not so, notes Krastins. However, the first six months this year showed that positive growth has been achieved as compared to the first half of 2011. The airline’s losses this year are hoped to be much smaller than in 2011, and airBaltic already operated with a profit in July, explains Krastins.

Thanks to the new business plan, airBaltic indexes should improve in the second half of this year, therefore the sales process could continue for at least two years, stressed Krastins.

A viable partner must be found, but it will take some time.
Krastins says that the value of airBaltic is increasing with every passing month. “Latvia’s prospective accession to the euro area, Riga as the European capital of culture, Latvia’s presidency in the European Union will potentially generate an increase in tourists, and airBaltic stands to benefit from this. The fact that the airline’s fleet will have new aircraft in 2015 will also increase airBaltic value,” explains Krastins, adding that in 2014 airBaltic could already be one of the most valuable companies in Latvia.