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Air Baltic sets out on recovery road

Turnaround specialist Martin Gauss is already reporting progress in efforts to stem the bleeding at the Latvian carrier
umours that the European Union may instruct Latvias Air Baltic to pay back up to 80 million ($104 million) in state aid are understandably of concern to chief executive Martin Gauss particularly given his memories of heading up Hungarys Malev, which went to the wall over 280 million of EU debt. But Gauss has form for turning around European carriers having sold DBA, formerly Deutsche BA, to Air Berlin in 2006 and his ReShape plan at Air Baltic is already beginning to show signs of progress. The former Boeing 737 pilot took up his position in Riga a year ago. His appointment followed a bitter dispute between the Latvian government and previous chief executive Bertolt Flick, whose offshore investment vehicle subsequently sold its 47.2% stake in Air Baltic back to the state.

An overhaul of the fleet is central to the restructuring plan capacity, Gauss set about slashing excess capacity and cutting costs under ReShape. Although the hybrid airline still plans to expand in the future, Gauss accepts that he must rst cede market share to low-cost carriers. Central to the restructuring plan is the overhaul of Air Baltics eet, which comprises eight 737300s, ve 737-500s, eight Bombardier Dash 8 Q400s and seven Fokker 50s. Gauss signed a letter of intent at the Farnborough air show for 10 CSeries CS300s plus 10 purchase rights, and he expects to rm up the order by the end of the year. We have asked external consultants to help us on the contract and the negotiation, he explains. We agreed in the letter of intent what time we intend to nish it its denitely happening. The rst CSeries will arrive in late 2015, with further units being delivered at a rate of one every one-and-a-half months. The 10 aircraft in the preliminary agreement will be used to maintain capacity as the 737s are phased out, while any net growth will be achieved by exercising the purchase rights. Once the CSeries order is fullled, Air Baltic will operate a two-type eet of CS300s and Q400s of which another four should arrive next spring and more immediate streamlining is already under way. The Fokker 50 eet will be fully withdrawn by the beginning of 2014, Gauss conrms, noting that just ve of the aircraft will be operational this winter. We are phasing them out gradually. Moreover, the chief executive is actively renegotiating his Boeing eet ahead of the CSeries arrivals. We paid up to $207,000 a month for a -300 [before

has also been working with the Latvian government in pursuit of a long-term investor to help mollify Brussels. Air Baltic placed advertisements in the UK press in September, inviting expressions of interest for a 50% stake minus one share. Although Gauss accompanied the Latvian prime minister on trips to the UAE, Qatar and China this year, he says he does not expect a quick win in the hunt for an investor. I know it can happen, he insists, citing his days at DBA. But I also know when is the right time to ask. Now we are in the phase where we show clearly what we can do, and we show month by month the performance of the plan.

Another long-term goal for Air Baltic is the restoration of its secondary hubs in Tallinn and Vilnius. Lithuanias ag carrier collapsed in 2009 leaving Estonian Air as the only obstacle to Air Baltics regional dominance but Gauss is not bullish when asked about the subject. He argues that establishing a pan-Baltic ag carrier should be a collaborative effort. Wed like to do this together, he says, alluding to Estonian Airs opposition to a merger. That would be perfect. We can also do it alone, but we are looking for an approach which does not involve us going there and competing with whoever is there. Whatever the future holds, Gauss is determined to replicate his success at DBA through ReShape. Having just extended his contract through to 2014, the chief executive is clear about what his shareholders expect of him. Im just here to do the turnaround, he says wryly. After that I will go.
Read more about the fortunes of European carriers in 2011 and the challenges ahead at:


The airline last year amassed losses of 80 million lats ($130 million at the time) and its ReShape programme envisages a gradual turning of the tide losing 38 million lats in 2012; 16 million lats next year; and entering the black in 2014. The programme is already 5 million lats ahead of schedule, aided by Air Baltics modest but symbolic prot in July. Our RASK and CASK ratio were the wrong way round [before ReShape], and the forecast losses for the future would have been even higher than the record loss in 2011, Gauss recalls. So we had to do something to stop it. As previous expansion at the airline had consistently seen revenue growth trail behind extra
Revenues Loss Passengers Fleet $525m $130m 3.3m 29 aircraft

Gauss has been working in pursuit of a long-term investor

ReShape], and now we can get it for below $100,000, he notes. There is a reason why this airline lost money. In lieu of cheaper 737 Classic leases all of which are up for renegotiation by 2014 Gauss will consider upgrading to the more fuel-efcient 737-700. We compare the -300 values with the -700, and if the -700 market is favourable then we will take used -700s, he says. We are discussing this basically every week with leasing companies. As negotiations continue over the eet modernisation, Gauss

16 | Airline Business | November 2012