Latvia’s national airline, airBaltic, has been in existence for 30 years and though often described as a success story, the company has frequently turned to the state to ask for financial assistance worth many millions of euros. Latvian Radio’s ‘Open Files’ investigative show has looked at airBaltic’s balance sheet and asks how – and if – that public money can ever be recouped.
The state has invested more than half a billion euros in the company’s share capital, with successive governments and the company itself often arguing that the positive impact of airBaltic on the wider economy is a crucial factor that means that money invested in the airline creates opportunities for other Latvian companies. But how can this impact be measured and is it as significant as it is assumed? Open Files attempted to find out.
airBaltic carries its passengers with only one aircraft model. It is the Canadian-made Airbus A220-300. The company currently has 50 such aircraft in its fleet, and plans to double their number by 2030.
Although airBaltic has made a profit of 4.2 million euros so far this year, it suffered losses of around 118 million euros last year, which the company blames on problems with its aircraft engines. Many other airlines have suffered similar woes.
With a turnover of over 747 million euros last year, airBaltic is the fourth largest company in Latvia, and employs almost three thousand people. What does this mean for the country’s economy?
To find out, Latvian Radio went to the Bank of Latvia, where its economists, commissioned by the Ministry of Transport, have conducted a yet-to-be-published study on the role of airBaltic in the economy. For this purpose, they used a special macroeconomic model.
“It’s very large – there are about 60 thousand equations, well, that sounds pretty impressive,” said Konstantīns Beņkovskis, advisor to the Monetary Policy Department of the Bank of Latvia, who is one of the authors of the study. “I’m not saying we know everything, but we can model this,” added Benkovskis.
He and his colleagues have looked at two potential scenarios. One looked at what would happen if airBaltic simply ceased to exist. The other analyzed a situation in which airBaltic’s niche would be filled by foreign competitors.
“In both cases, the impact on the economy was quite clearly negative. I would say, in percentage terms of GDP, between 0.8 and 1.1 percent. Most of all, of course, in the sectors related to travel. But there was also a rather negative effect, for example, on such an important sector as retail. And it was also important to assess the impact on the budget,” said Beņkovskis.
Latvia’s gross domestic product (GDP) was 40.2 billion euros last year. So the potential impact would be approximately 322 to 442 million euros.
Which of the scenarios is worse? “Of course, the biggest negative effect is when competitors do not enter the Latvian market, because in this case the decline in passenger turnover is greater for Riga Airport and also for “Latvijas Gaisa satiksme” (Latvian air traffic control), said the expert from the Bank of Latvia.
The economists also described in the study what would happen if airBaltic ceased to exist. In such a case, the state budget would lose approximately 200 million euros per year. In turn, budget spending would increase by approximately 50 million, most of which would be in unemployment benefits.
Benkovskis added that this is the most pessimistic model.
“These numbers are not exact, if only because we have a lot of assumptions behind them. We don’t know what the contracts are at airBaltic. We don’t know because some people will still find work. We don’t know whether people who are still receiving unemployment benefits will find work, or whether they will be people who have long stopped receiving unemployment benefits,” said Beņkovskis.
What does the aviation industry itself say about such hypothetical scenarios, if airBaltic were to suddenly cease operations or another company were to enter its place? Latvian Radio turned to the Latvian Aviation Association, an association that unites dozens of members, including airBaltic itself and its two subsidiaries. The association is headed by Zigmārs Vestfāls.
“It would be a big shock in the short term. It would cause an outflow of specialists from Latvia, it would cause quite a lot of, let’s say, slowing down of other projects, making them impossible. It would actually be a very big blow to this industry,” said Vestfāls.
He said that even if another airline were to enter the Latvian market, the investment in the local market would decrease.
“None of the foreign airlines that could potentially, let’s say, try to fill this space would do as much as airBaltic does, directly developing Riga, Riga Airport, as a transport hub,” said the member of the board of the Latvian Aviation Association.
Training for new pilots would also suffer. “So, the pilot academy, training, all those things that educate young specialists. It’s unlikely that foreign airlines would do that in Latvia,” said Vestfāls.
The airline, in his opinion, also has a significant impact on other sectors of the country.
“From the association’s point of view, the importance of airBaltic in Latvia is truly invaluable. In our opinion, it should be evaluated not only as a profit and loss balance, but as a part of the country’s strategic infrastructure, similar to ports, railways or energy networks.”
In turn, citizens and businesses can quickly reach their destinations in Europe.
“This is also very important for modern business, IT and many financial institutions. By the way, it also attracts foreign investments. Knowing that we have airBaltic, it is much easier to approach foreign companies,” Vestfāls pointed out.
Vestfāls himself works for LSG Group, a German-based international business that provides catering services to the aviation industry. It also includes Airo Catering Services Latvija, which still has a contract with airBaltic and is a member of the Latvian Aviation Association.
Should the Latvian state continue to financially support airBaltic?
“There are a very large number of other national carriers in the world that have also received state aid. Lufthansa, Air France, and Finnair. And, yes, such national carriers of countries are very often considered the backbone of national security and economy. Therefore, in the opinion of Latvian aviation, it must continue,” said Vestfāls.
In recent years, the state-owned airline airBaltic has invested significant amounts of money. During the Covid-19 pandemic, this amounted to 340 million euros. In May of this year, the State Audit Office released an audit assessing whether the responsible authorities have sufficiently monitored how this money is being spent.
“So right now we see that this has not really happened,” said Mārtiņš Āboliņš, a member of the State Audit Office Council. “What we concluded, first of all, looking at the information expressed in the public space… was it planned or not to recover these investments made during the Covid-19 period, when there was clearly clear communication, and the intention to recover these funds was also evident in the initial plans.”
Last year, airBaltic decided to reduce its share capital by 571 million euros, effectively “writing off” its debt to the state. The company explained at the time that this was a necessary step to be able to go for an IPO, or initial public offering. This method allows it to start selling its shares on the stock exchange and raise additional capital.
Āboliņš said that the airline had aggressive plans to expand.
“Attracting capital was, let’s say, the primary goal. And what we perhaps didn’t see was clarity, let’s say, about such specificity – where to fly, to what extent, what is the type of business we will make money with? So the primary ambition is – the company needs to attract capital, it needs to go public, this investment story is needed, so the company needs to grow, expand,” Āboliņš explained.
Is there a risk again that the state will have to help the company and invest more large sums of money in it?
“When thinking about any further investments in airBaltic, we need to actually reassess this business plan and understand its viability, because the way it was built, its main goal is expansion so that it can go public. We see that these attempts to go public have already been postponed several times, are not happening. Consequently, the company’s financial situation is definitely not improving, but rather is even getting worse,” admitted the member of the State Audit Office Council.
During the production of the Open Files broadcast, several unrelated sources unofficially suggested that in order for airBaltic to continue operating next year, it will require investments of at least 200 million euros per year. Approximately 40 million euros will be needed in the first quarter, it was claimed.
On February 11 of this year, airBaltic’s supervisory board changed, and Andrejs Martinovs became its new chairman. On a daily basis, he runs a company that manages various investments, including pension funds. The supervisory board is separate from the executive board which is responsible for day to day decision-making in the company.
“airBaltic has finished the first half of the year with small losses. Of course, perhaps in absolute numbers, to ordinary ears, even the 1.7 million that are airBaltic’s losses seem like big numbers to ordinary people. But in comparison – in the first half of the previous year, we lost 88 million, almost 89 [million euros],” explained Martinovs.
When asked whether the airline will need at least 200 million euros next year, Martinovs said: “Well, we’re not at the Central Market to discuss rumours, right? I can only give you comments in terms of the data that has been made public, because we are a stock exchange issuer, we have issued bonds. And therefore, even if what you claim were true, I wouldn’t be able to comment on it for you anyway.”
Martinovs also drew attention to the fact that airBaltic still wants to expand.
“We need to remember that airBaltic’s strategic goal is to increase the fleet by 50 aircraft. And it is clear that this path or this goal is being implemented even now. We have ordered new aircraft, and we are on course to do so,” said Martinovs.
Where will the company get the financial resources to continue developing and expanding its fleet?
“In this case too, if we come up with an offer to invest additional funds to secure our path, the first thing we will offer is to the existing shareholders – both Lufthansa and the state. And that is, as they say, one of their most prominent rights as existing shareholders – to decide whether to participate in the capital increase or not,” said the chairman of the airBaltic supervisory board.
Since the largest shareholder among the current shareholders is the Latvian state, Martinovs sees two more options for attracting external investors.
“It’s either a public offering or a private one. Private is when a certain group of potential investors or strategic investors or interested parties are identified, and an offer is made to everyone at the same time. That’s a private act. And public, which is an IPO,” said Martinovs.
The state monitors its shareholding in airBaltic through the Ministry of Transport. What does Transport Minister Atis Švinka (Progressives) think about possible financial difficulties?
“Of course, we see that this capital shortage is a current problem, but it did not arise today or yesterday, or in recent months. It has been a fundamental problem that the previous manager and council have brought airBaltic to this situation for several years,” said Švinka.
He said that addressing these problems, including seeking financing, will be one of the tasks of the company’s new CEO, Erno Hilden, who will take the helm on December 1.
Hilden will receive a lower salary than his long-time predecessor, Martin Gauss, who lost his position in April this year.
“It is never and cannot be the case that there is only one option for raising money. And it has historically been the case that the previous leader had always done so, coming to the state and saying: “This is the only option, and the entire Latvian society must be saved!” Other financial instruments are possible,” the minister said.
Švinka also explained why, in his opinion, it is important to make long-term investments in airBaltic.
“We see that airBaltic is definitely a plus for the national economy, for the Latvian economy. (There is) a fairly strong aviation industry, [because of] airBaltic. This contribution is very, very significant, and therefore we must approach this responsibly. At the same time, the government has also pushed for the need to attract private investors,” the minister admitted.
When asked whether he was aware of any 200 million euro investments needed in airBaltic next year, Finance Minister Arvils Ašeradens (New Unity) said: “Currently, the government and the Ministry of Finance are working on preparing the budget for the second reading. The budget does not include airBaltic issues.”
He said that he has not received any requests or offers from the Ministry of Transport at the moment. Therefore, the minister refused to comment further. “We have not received any requests or offers from the Ministry of Transport regarding this issue, or or that we should be involved in resolving such matters,” said the Minister of Finance.
The Bank of Latvia’s study on the impact of airBaltic on the economy will be accompanied by an information report. It could be submitted to the government in December. This report could serve as an aid to politicians if it becomes necessary to decide on additional money for the airline. Although several sources said in unofficial conversations that many more millions would have to be invested in the airline, no one confirmed this in official interviews.
The Bank of Latvia’s presentation suggests that airBaltic’s estimated impact on the Latvian budget is at least 200 million euros and upwards. This amount is similar to what sources have mentioned as what the company needs.
In turn, industry experts surveyed by Latvian Radio agree that the airline provides connectivity to many European and world cities, and can also help attract investments.
Travel blogger Alina Andrušaite said that she travels both on private trips and on business trips with airBaltic. What does she think about airBaltic’s financial needs? Does she think the state should continue to invest sums of money in the company?
“200 million, if you compare it to how much money other airlines are pouring in, is not a small amount, but it’s a low-level [amount of money]. Of course, if we compare it to how big Latvia is and how big airBaltic is, how many inhabitants we have, and if you divide it per capita, then again proportionally the amount is much larger… Then that’s money that could be spent on something else, like healthcare,” said the travel blogger.
However, she called for an appreciation of what a national airline provides to residents and said its products generally represent decent value for money in the international marketplace.
“It’s not for nothing that they say that in any other sphere, if companies treated their customers like this, they wouldn’t have customers, but in this industry there aren’t many other options if we want to fly somewhere. We can try to take a bus, look for another airline there, but how many more hours do we want to dedicate to it and more money? There was one moment when I tried that too and thought, well, now I’ll try flying with other airlines, and many cases in a row coincided when something was delayed there. I got stuck twice with strikes at Lufthansa. So it’s not like the grass is much greener somewhere else,” said Andrušaite.
“I have been able to particularly appreciate the fact that we have a fairly extensive network of direct destinations and fairly good connections. Consequently, if I have had to travel somewhere that is perhaps not such a European center, say, Hamburg rather than Berlin, then, compared to colleagues from other countries, it has usually been quite difficult for them to get to Hamburg, while for us, those flights were usually – at least in the past – twice a day, when I used to fly there often,” said Andrušaite.
Prices are not the only thing to consider. “Of course, there is also the question of how comfortably we want to travel. If a small handbag with the bare minimum is enough for us, then we can also use low-cost airlines. If we still want at least the small suitcase that is already included in the ticket, I think airBaltic is also a pretty good offer. In other words, its price and what is offered, I think, is a good option,” Andrušaite said.
