Thursday, 4 October 2012

Interview: Martin Gauss, Air Baltic CEO

ReShape results will spur Air Baltic investors: Gauss

Demonstrable success under the 'ReShape' restructuring plan will be the driving force behind Air Baltic's search for a strategic partner, chief executive Martin Gauss tells Flightglobal, with management looking to make the case for investment through quantifiable results.

Insisting that talks with prospective Gulf and Chinese partners remain at the early stages and may not require due-diligence for "a while", Gauss candidly adds: "I don't expect a quick win on this one, but you never know."

Advertisements in the UK press this month invited expressions of interest for 50% of the flag carrier minus one share. Latvia's government has been searching for a new co-owner since last year's divestment of a 47.2% stake by Baltic Aviation Systems, the offshore investment vehicle headed by former chief executive Bertolt Flick. That break-up left the State with virtually the entire share capital of the airline.

Mindful of EU scrutiny, Gauss says: "A private investor as early as possible is better, and the government would be happy. We don't exclude anybody coming now. But my personal opinion is that it is much easier when you can prove that your business model works."

To that end the airline's restructuring plan, dubbed ReShape, has produced a roadmap for dramatically scaling back last year's loss of about 80 million lats ($130 million at the time). The programme initially targeted a loss of 38 million lats this year, 16 million lats in 2013, and profitability in 2014. But it is already outperforming, Gauss says, with Air Baltic currently 5 million lats ahead of schedule for 2012.

"Our RASK and CASK ratio were the wrong way round [before ReShape], and the forecasted losses for the future would have been even higher than the record loss in 2011," he recalls. "So we had to do something to stop it."

Air Baltic's response came in the form of sharp capacity reductions; rationalised staffing costs; and the signing of a letter-of-intent for 10 Bombardier CSeries jets, paving the way for a two-type fleet alongside its Dash 8 Q400s. The hybrid business model - combining ancillary revenue generation with premium cabins and a primary-airport network - remains central to its strategy.

ReShape also pays heed to the rising threat posed by low-cost carriers (LCCs), charting an expansion trajectory for Air Baltic which pragmatically cedes parallel growth to the likes of Ryanair.

"Today the average capacity share for low-cost carriers in Europe is 29%," Gauss notes. In Latvia, however, the figure is lower, meaning that LCCs stand to benefit the most from the 7% annual growth IATA forecasts for the region. "If Riga reaches average [LCC penetration] it will mean the low-cost carriers grow their share by 38% ... Air Baltic only expects to grow by a maximum of 4% in 2016. So we will reduce our market share in Riga."

"We have to assume the low-cost carriers will become stronger," Gauss emphasises. "I will always copy something successful done by the leading low-cost airlines, but I can't stop serving Brussels, for example."

Notwithstanding the challenges, the chief executive has a track-record for successfully restructuring carriers. His turnaround plan at DBA saw the former British Airways subsidiary post its first ever profit in 2005 - ending a 12-year run of losses, and ultimately making the case for Air Berlin to take over the carrier. It is no accident, Gauss says, that Air Baltic's lime green livery bears such a striking resemblance to DBA's.

"I know it can happen," he says of finding an investor. "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."

July's report confirmed that Air Baltic is slowly moving into the black, posting a net profit of 1.4 million lats. Gauss is quietly confident of the same in August and September, though he accepts that the winter season will be more difficult. With every month that the strategy holds water, he says prospective partners in the Gulf, Asia and elsewhere will sit up and take note.

Confirming that he accompanied the Latvian prime minister on trips to the UAE, Qatar and China this year, Gauss adds: "We talked to all three airlines [Etihad, Emirates and Qatar Airways] in early spring ... I also had some discussions in China this month. We were able to show them what we want to do, and the future will show what happens."

Air Baltic looks at 737-700s ahead of CSeries arrival

Air Baltic is in the market for Boeing 737NGs as it looks to renegotiate interim leases on older-variant 737s ahead of its first Bombardier CSeries delivery in late 2015.

The Latvian flag carrier is streamlining its fleet under its 'ReShape' restructuring plan, initially aiming for a mix of 737s and Bombardier Q400s before replacing the former with at least 10 CSeries CS300s. By spring 2013 all remaining Fokker 50s will have been withdrawn and four additional Q400s will likely have entered the fleet, chief executive Martin Gauss says.

Air Baltic's forthcoming winter fleet will comprise nine 737-300s, two 737-500s, eight Q400s and five Fokker 50s. The airline also has five other Fokker 50s in storage or on the ground, and it wet-leases two Boeing 757-200s to Cambodia's Tonlé Sap Airlines.

"I hope [to firm up the CSeries order] this year," Gauss says. "We have asked external consultants to help us on the contract and the negotiation. We agreed in the letter of intent what time we intend to finish it ... it's definitely happening."

The first CSeries will arrive at the end of 2015, he says, with subsequent airframes arriving at a rate of one every one-and-a-half months. The 10 aircraft covered in the preliminary agreement will be used to maintain capacity as the 737s are gradually phased out. Any net growth will then be achieved by exercising Air Baltic's purchase rights for 10 more CSeries.

However, with all of the airline's older 737 leases expiring over the next two years, Gauss is also renegotiating interim contracts "piece by piece" - eyeing either lower rates on 737-300s or upgrades to 737-700s.

"We're looking actively for the -700s," he says. "We compare the -300 values with the -700, and if the -700 market is favourable then we will take used -700s instead ... We are discussing this basically every week with leasing companies."

Gauss credits the 737-700 with "lower fuel burn and maintenance advantages", but he will still consider 737-300s if the price is right. "We paid up to $207,000 a month for a -300 [before ReShape], and now we can get it for below $100,000," he notes. Four older 737s are up for renegotiation this year and two more in 2013, while two have been returned in recent months.

Air Baltic is also poised to exercise its options for four new Q400s - bringing the fleet size to 12 by next spring - in order to compensate for the exit of the Fokker 50s.

"The Fokker 50 fleet will be fully withdrawn by the beginning of 2014," Gauss confirms. "We are phasing them out gradually." Three of the aircraft are already in storage, two are in the process of being withdrawn, and the remaining five will fly over the winter before being taken out in spring 2013 - either to be returned early or kept in hangars.

Describing the fleet renewal as a "major part of the ReShape plan", Gauss says he expects significant cost savings from a more fuel-efficient, streamlined fleet. Airbus A320s are "not being considered anymore", he adds.

Pan-Baltic flag carrier still ‘ultimate goal’ for Air Baltic

Air Baltic remains interested in exporting its brand across the region to become a pan-Baltic flag carrier, chief executive Martin Gauss says, though the form of any such entity is up for debate and domestic restructuring must take priority.

Asked to clarify the Latvian airline's pan-Baltic aspirations, Gauss tells Flightglobal: "We have a nice name, it's called Air Baltic. I think that says it all."

Latvian prime minister Valdis Dombrovskis and transport minister Aivis Ronis have both openly supported a merger between Air Baltic and Estonian Air. But Gauss has historically downplayed the appeal of a shared Baltic carrier, insisting that a structure akin to Scandinavia's SAS could not easily be replicated across Latvia, Estonia and Lithuania.

Hinting at a long-term shift in strategy, he now says: "We believe we can fulfil the needs of the Baltic region by also serving the two neighbouring countries ... But we won't do it if it doesn't work for us financially. We won't just do it for the sake of it."

In a veiled reference to Estonian Air, Gauss says that any effort to export Air Baltic's brand to its neighbours should ideally involve collaboration with domestic operators. Lithuania's flag carrier, FlyLal, suspended operations in 2009.

"We'd like to do this together," Gauss says. "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 whomever is there. We would like to do this in a co-ordinated way."

Efforts by Air Baltic's previous management to establish secondary hubs in Tallinn, Estonia and Vilnius, Lithuania were deemed unsuccessful and promptly abandoned. A proposed hub at Oulu airport in Finland was also shelved.

With Latvia and Estonia both now consolidating their flag carriers' networks, neither side is likely to launch a competitive assault on their neighbour's hubs - least of all given the growing threat from low-cost carriers. Longer term, however, the chief executive says the Baltic states are a "potential growth area" and he is "open to discussions in any direction".

"As soon as we believe we can do something successful ... we will look into it," he confirms. "But the company is in a heavy restructuring programme. We cannot just go ahead and spend money on some adventure."

For the time being, the pan-Baltic vision is aspirational, and Estonian Air remains a competitor. "Until recently they were serving Riga, taking passengers to Tallinn before taking them on to destinations where we also fly," Gauss notes. "What we do - taking passengers from Tallinn to Riga - they were doing the exact same thing."