Friday, 19 April 2013

Interview: Martin Gauss, Air Baltic CEO

Air Baltic confirms preliminary talks with Japanese carriers

Latvia's government sent a delegation to Japan in April to discuss possible investment in flag carrier Air Baltic, chief executive Martin Gauss tells Flightglobal.

Talks were held between Latvian officials and Japan's two largest carriers - Japan Airlines (JAL) and All Nippon Airways (ANA) - though Gauss stresses that they were "preliminary discussions" and no decisions have been taken.

State-owned Air Baltic last year said early-stage talks had also been held with unspecified parties in the Persian Gulf and China.

"The shareholder is looking in all directions for what is possible for the future," Gauss says, adding that airline management are not directly involved in the negotiations. "The best thing we can do is continue the [ReShape restructuring] plan better than expected."

Latvia's government is soliciting expressions of interest for 50% of Air Baltic minus one share. The state has been looking for a co-owner since Baltic Aviation Systems (BAS) divested its 47.2% holding in the airline two years ago.

In November 2012, it emerged that BAS had filed a complaint with the European Commission alleging that the airline benefited from illegal state aid during the partnership.

Asked about the status of the investigation, Gauss says: "We are confident that what the shareholder has done is in line with private investor principles. We are in the process of answering the questions, and we don't know when the commission will make its decision."

The EU probe centres on a capital injection committed to jointly by BAS and the government in late 2011, Gauss explains.

Both parties honoured the first instalment, but BAS subsequently withdrew from the agreement after deciding to sell its stake. The government then stepped in to ensure that the airline could continue operating despite its unexpected loss of funding.

"The private shareholder signed up for it, but then failed to pay the money," Gauss notes. "So the state jumped in and said it will take that part as well, rather than lose the airline."

Gauss says the government has an "expert group" assessing the legal detail of the agreements, but he emphasises that the financial sums in question are "not so dramatic". Air Baltic management will "wait and see, and we'll have to live with what is decided," he concludes.

"Either way we will reach profitability in 2014, and if you're a profitable airline it's not so difficult to deal with issues coming from the EU."

Air Baltic this week reported a full-year net loss of 19 million lats ($35.4 million) for 2012, marking a 78% improvement on the previous year's result. The airline had budgeted for a loss of 38 million lats. Gauss credits the ReShape plan with stemming the losses.

Air Baltic to operate returned 757s over summer

Air Baltic will deploy two Boeing 757s primarily on routes to Estonia and Lithuania over the summer season, chief executive Martin Gauss says.

The 757-200s, which are painted in Air Baltic's livery, were until recently wet leased to Cambodia's Tonlé Sap Airlines.

They will be used to operate flights to Tallinn in Estonia and Vilnius in Lithuania, as well as being occasionally deployed to Paris, Barcelona and possibly some other European destinations.

"Until we find a new wet-lease partner, we will deploy these aircraft on high-density routes as needed," Gauss tells Flightglobal. "One of the aircraft is in [Latvia's capital] Riga already, and the other one is being returned."

He says turnaround plan ReShape still envisages transitioning to an all-Bombardier fleet of Dash 8 Q400s and CSeries CS300s, and that Air Baltic is "actively seeking" a replacement wet-lease customer for the 757s.

But operating the mid-size jets on an interim basis "makes a lot of sense", Gauss continues, as some summer routes are already overbooked and "we have them sitting on the ground anyway".

"If we didn't use the 757s we would have had to send two 737s in parallel to Tallinn," the chief executive notes. Separately, Air Baltic has used its cash reserves to buy four previously-leased Boeing 737-500s. This will give the airline flexibility in the event that its CS300 order is delayed, Gauss says.

Air Baltic is no longer considering replacing its 737-300s with 737-700s on short-term leases, he adds, as the newer models are "too expensive".

The airline operates a fleet of eight Q400s, seven 737-300s, four 737-500s and three Fokker 50s, Gauss says, though two other 737s remain in its possession. The Fokker 50s will be retired by August, after four additional Q400s arrive on 12-year operating leases.

The Boeing fleet will then gradually be withdrawn as Air Baltic takes delivery of 10 CS300s, which will begin arriving at the end of 2015.