Higher numbers mask Estonian Air’s troubles

  • 2012-11-28
  • From wire reports

HOLDING PATTERN: Jan Palmer says the airline’s large losses aren’t sustainable, with more state funding needed.

TALLINN - Estonia’s national airline Estonian Air will cut its fleet in half, to five aircraft, amid implementing necessary cuts to staff due to difficulties it is facing, reports AFP. “The structure of the company will be based on operating five aircraft and serving nine to ten core destinations,” new chief executive of Estonian Air Jan Palmer said in a statement.
On Nov. 20, the airline announced that in order to adjust operations to the reduced flight capacity, it will decrease its staff by nearly a half. Currently, Estonian Air operates a ten-plane fleet.

Created in 1991, the airline has had mixed fortunes. It was privatized in 1996, and from 2003 to 2010 was almost evenly split between the state, which owned 51 percent, and Scandinavian carrier SAS, with 49 percent. Since then, the state has gradually upped its holding to the current 97 percent.
In November 2011, the government announced that it was injecting 30 million euros to renew Estonian Air’s fleet and bolster business, with the long-term goal of seeking a new strategic investor.

In the first nine months of this year, Estonian Air operated a total of 14,964 flights, or 72 percent more than in the same period of 2011. The drive to boost passenger figures by offering more connections via Estonia appeared to have borne fruit, with numbers over the same period rising by 71 percent to 686,106.
But the airline failed to plug the hole in its coffers, even though revenues in the first nine months of 2012 reached 70.4 million euros, compared with 58.7 million euros in the same period of 2011. Nine-month losses hit 20.2 million euros, up from 11.2 million euros in the first three quarters of 2011.

Turnaround candidate
Palmer says that the new action plan for the company should enable it to reach profit by next summer, reports Postimees Online.
Palmer said that he has during the three weeks he has worked in the post gotten informed about the company’s situation and sees that the large losses and activities are not sustainable. The loss in nine months was 20.2 million euros and is increasing.

“The company loses 2.5 million euros a month and it cannot continue this way,” said Palmer.
Despite the major redundancies announced last week, in the course of which nearly half of the company’s staff loses jobs, Estonian Air will need extra financing from the state in December. The amount is not clear yet and depends on how the reorganization of the fleet progresses.
Palmer said that he will do all that he can to make sure the company continues operating. “I have seen in Sweden what it means when a region doesn’t have the air connections it needs. It is a serious problem and important for Estonia,” he said. “It is my interest to keep that company operating.”

State-aid rules
The Estonian media are full of speculation on the airline’s future prospects.
TV3 reporter Sven Soiver, for instance, reported his feelings after a press conference on replacement of ex-CEO of Estonian Air Tero Taskila with Palmer. As the representative of TV3 stated, he got the impression that Palmer’s job is to come up with a plan of how to reduce to a minimum the cost of the airline’s inevitable bankruptcy to the state in contractual penalties, compensation of fares, etc. and how to sell existing contracts, the customer base and slots as profitably as possible.

“Even Palmer’s employment contract was made for a fixed term,” Soiver wrote.
If the European Commission does not allow the Estonian government to grant state aid to the airline, it is likely that the national carrier will be allowed to go bankrupt, as Estonian Prime Minister Andrus Ansip and Economy Minister Juhan

Parts have noted.
Ansip said that he has to withdraw his earlier promise that Estonian Air won’t be allowed to go bankrupt, although bankruptcy is not the option the government would prefer.
Parts said that the government will discuss the matter again in a couple of weeks and final decisions will be made in the first quarter of next year.

Estonian Air pilots are mulling holding a strike at the beginning of December.
Parts said at the government’s Nov. 15 press conference that no decisions were made by the government on the airline’s future. He explained that Estonian Air submitted to the state, as the owner, two options. “The first is ending activities via insolvency. The other option is that the state would finance the plan of Estonian Air continuing independently.”

Parts said that in the first case, the state is interested in flight connections corresponding to the state’s development needs. This would mean a possible state procurement for connections that are of public interest.
In the second case, the state would have to make additional investments in the company but that has several conditions. “This means that the company has to be regionally competitive in its activities. This requires a fundamental revision of the current collective labor agreement, the other condition is that the investment has to be in line with the European Union aviation state aid rules,” said Parts.