State has failed to follow up recovery of investments made in airBaltic during Covid-19 - State Audit Office

RIGA - The State has failed to follow up the recovery of investments made in the Latvian national airline airBaltic during the Covid-19 period and has so far acted more as a "purse to draw from" than as a sufficiently qualified and demanding owner of the capital company, according to the State Audit Office.

The Audit Office has carried out a follow-up on the implementation of recommendations made in the 2021 audit on the state supervision of the investment in airBaltic during Covid-19.

Latvia's total contribution to the share capital of airBaltic amounts to EUR 545 million. Of this, the State invested a total of EUR 340 million during Covid-19 to mitigate the effects of the crisis in 2020-2022, increasing the State's share in the company from 80.05 percent to 97.97 percent.

The State Audit Office has concluded that none of the supervisory levels - the Ministry of Transport, the airBaltic Supervisory Board, the Cabinet of Ministers - has taken sufficient action to potentially facilitate the recovery of the State's investment.

The State Audit Office reminds that the State had initially committed to recover the EUR 250 million allocated to airBaltic in the first phase. This was clearly stated both in official documents and public statements until June 2023. According to the strategy approved by the Cabinet in 2021, the recovery of the investment was planned to take place through an Initial Public Offering (IPO), in which part of the State's shareholding would be sold, reducing the shareholding to 51 percent.

However, as the State Audit Office has found, the strategy lacked a concrete action plan. This is evidenced by the fact that the approved strategy was never revised, despite significant changes, including the second wave of the Covid-19 pandemic, Russia's full-scale invasion of Ukraine, aircraft engine problems and several changes to airBaltic's business plans. Meanwhile, the State invested a further EUR 90 million in the company.

In August 2024, the government decided to reduce airBaltic's share capital by EUR 571 million, which the company sees as an essential prerequisite for a successful IPO. Following this decision, officials and representatives of airBaltic "publicly made unsubstantiated statements that the recovery of the investment was never planned, or stressed that the state aid had already been repaid through taxes and economic contribution," the State Audit Office notes.

The aid to airBaltic was provided in compliance with the then applicable European Commission (EC) regulation, thus placing the company in a "state aid situation". This meant that airBaltic had to comply with certain restrictions, for example on the remuneration of its Board of Directors. According to the State Audit Office, the main objective of the exit from State aid is to reduce the State's shareholding in the company. However, it is up to Latvia, as the aid provider, to decide whether it recovers its Covid-19 funding as a result of this process. Currently, the Temporary Framework contains further exit mechanisms, including without actually recovering the investment. However, the Cabinet has not yet approved such an exit strategy.

In addition to the EC conditions, countries had the possibility to apply stricter conditions. Latvia did not set any. Although the public and the government were informed in 2020 about a voluntary 20 percent salary cut for airBaltic management at the beginning of the Covid-19 crisis, the audit found that this amount was only temporarily withheld and was paid to the Board in January 2022 on its own initiative.

In 2021, the State Audit Office invited the Cabinet of Ministers to establish a specific procedure to manage the risk of recovery of airBaltic's investment. The Cabinet did not establish it, continuing the monitoring under the 2015 rules.

The information reports submitted to the Cabinet of Ministers by December 2024 on the actual situation were prepared by airBaltic itself. The information reports, unless they were related to the need for additional investment, mostly highlighted the positive aspects of airBaltic's operational performance without mentioning various risks related to the financial situation, the State Audit Office has concluded. Most of the reports are not publicly available, reducing transparency. The monitoring by the Cabinet was not based on a structured analysis of information on indicators and results that would show progress towards recovering the investment or identify deviations in time to take corrective action.

On the other hand, the Ministry of Transport has still not established a system for the management of capital companies that would enable the State to pursue the strategic objectives of the sector and promote the rational use of resources. The Ministry still does not receive essential information to fully exercise its oversight of airBaltic (e.g. staff remuneration, capital investments).

In the State Audit Office's assessment, the Ministry of Transport does not react sufficiently to important information when it does come to its attention. The Ministry does not fully participate in the definition of financial and non-financial targets.

The State Audit Office concludes that the Supervisory Board of airBaltic has not sufficiently monitored the Board's remuneration limits. Despite the difficult financial situation, the remuneration of the Board increased. Also, in 2022, the Board was paid bonuses for 2019 out of the State's Covid-19 related re-investment.

It was also found that the tasks of the responsible authorities were not sufficiently targeted to enable the State as a shareholder to fully monitor airBaltic's business plans and financial situation in order to facilitate the recovery of the investment. Nor have the strategic alternatives of the State as shareholder been assessed, leaving full discretion to the airline's Board of Directors.

The most significant changes to airBaltic's business plans were made in July 2023, with the approval of the latest business plan and fleet expansion plans. The State Audit Office concludes that the new plan and the growth plans contained therein are primarily focused on the successful implementation of the IPO, with the company considering that growth is a prerequisite for financial sustainability and business continuity.

At the same time, neither the company's growth paths nor the actual use of the fleet are clearly defined and these aspects may change depending on market and external conditions. The plans are based on a number of assumptions, including regional growth, and airBaltic's ambitions are not fully covered by the available finances.

The State's substantive involvement in the development of the business plans is still not fully ensured, the State Audit Office stresses. In the context of the current business plan, the responsible authorities assessed and issued an opinion on the plan, which envisaged two possible fleet size scenarios. The Supervisory Board of airBaltic did not provide them with information on which of these scenarios was chosen and why. The Ministry of Transport requested the most up-to-date version of the business plan from the Board only when it was due to be submitted to the State Audit Office.

Martins Abolins, a member of the Council of the State Audit Office, explains that the State Audit Office now considers that the viability of airBaltic's business plan should be seriously assessed. "The company's financial situation is difficult, as evidenced by losses both last year and at the beginning of this year, negative equity, as well as a significantly delayed and repeatedly postponed IPO process. There is no longer any question of the State recovering its investment through an IPO. On the contrary, the company is openly indicating the need for additional public funding, without which an IPO is unlikely," he said.

He also notes that although the company has grown rapidly and reached the fleet size originally planned, its financial situation has deteriorated. "In our view, further investment of public funds in the existing model without assessing its viability and sustainability would be unjustified. We call on the Ministry of Transport, the company's Council and the Cabinet to look for rational and economically sound alternatives for the further development of the company," Abolins said.

In November 2022, the State defined for the first time what it wants to achieve with its participation in airBaltic, or the overall strategic objective of the airline. This is to promote Latvia's international reach by providing passenger and cargo air services. A letter of intent, detailing this objective, has not yet been produced by the Transport Ministry.

In its growth plans, airBaltic does not sufficiently take into account potential risks that may affect the preservation of the value of the State's investment, nor does the State require it to do so. The State has so far acted more as a "purse to be borrowed from" than as a sufficiently qualified and demanding owner of the company, the State Audit Office has concluded.

The Latvian state owns 97.97 percent of airBaltic's shares, while the financial investor, Danish businessman Lars Thuesen's Aircraft Leasing 1, owns 2.03 percent.

airBaltic Group posted an audited loss of EUR 118.159 million for 2024, compared to a profit of EUR 747.572 million the year before, while its revenue increased by 11.9 percent year-on-year to EUR 747.572 million.