However, the difference is significant from a commercial perspective. The new flag carrier Air Baltic starts with both a clean sheet and a strong strategic partner, in the form of 29 per cent shareholder SAS, and has a good chance of turning a profit by 1998. As part of the deal which saw Air Baltic start up on 1 October 1995, both unprofitable incumbents shut down: government-owned Latavio and the US-Latvian joint venture Baltic International.
Air Baltic is established under a joint venture agreement with the Latvian government's privatisation agency, which holds 51 per cent of the equity, explains president and chief executive Kjell Fredheim - a former chief operating officer of SAS. The other joint venture partners are Baltic International USA (BIUSA) with 8 per cent and the Danish and Swedish investment funds for eastern Europe with 6 per cent each.
SAS had been keen to invest in Latvia ever since the Baltic states regained their independence in 1991, but refused to take over an existing airline and wanted management control. The Latvian government eventually agreed in August 1995 and Air Baltic was created with a share capital of US$12 million and access to a US$14 million subordinated loan facility. The government's share was subscribed partly in cash and partly in real estate. SAS has the right to nominate five of the top eight managers including the CEO and CFO and has two seats on the seven-strong board.
Air Baltic started operations on 1 October using two Boeing 727-100s and one Saab 340 on temporary wet-lease. During the winter season, Fredheim concentrated on training flightdeck crews on the aircraft he planned to take on dry-lease - three Avro RJ70s from AMO and one Saab 340 from the manufacturer - and on building a up the network.
Fredheim believes profitability is already within reach. 'You need some kind of critical mass which, with the fleet of four aircraft, is 200,000 passengers,' he says. 'With utilisation of 6.5 hours a day on the Saab and nine hours on the jets, and 20 to 25 per cent of passengers in business class, the airline will be profitable.' He is forecasting breakeven in 1997 and a small profit in 1998.
By May this year, Air Baltic was operating nonstop services between Riga and Copenhagen, Frankfurt, Helsinki, Kiev, London/ Gatwick, Minsk, Stockholm, Tallinn, Vilnius and Warsaw plus a one-stop service to Geneva. Air Baltic and SAS codeshare on each others' flights to Copenhagen (three times daily) and Stockholm (twice daily) and there is scope to develop two-way feed as SAS serves neither Kiev nor Minsk. The daily Geneva flight is operated via Copenhagen with joint designators on all sectors and complements the existing SAS Copenhagen-Geneva service. 'The main strategy is to operate a traffic system for the business traveller in close cooperation with the SAS system,' explains Fredheim.
He is also intent on keeping a 'lean organisation.' At one point Latavio employed 2,000 people, compared to Air Baltic's current headcount of 150. This number will rise to 200 and Fredheim is keen to develop multitasking, while instilling a new work ethic into former employees of the two airlines that were wound-up to make way for the startup. The carrier is pursuing a 'very intensive training programme,' and a training budget of $3.5 million is available this year.
Apart from the network benefits and a link with the Eurobonus frequent flyer programme, the partnership with SAS gives Air Baltic access to a whole range of services, says Fredheim.
His main aim now is to fine-tune schedules and add one more point to Air Baltic's network: Moscow. There are already two flights a day on the route - one operated by Aeroflot and the other by rival Riga Airlines (Riair), which codeshares with Transaero. With a relatively strong foreign partner and a B737 operation, Riair is a thorn in Air Baltic's side. 'It is obvious that there is not room for two major Latvian airlines,' says Fredheim, 'but as always it will take some time to sort out.'
Riair's president Maris Karklins is bound to disagree. Set up originally in December 1992, as a separate company to the now defunct Riga Airlines Express, Riair started operations in September 1994 and has a daily rotation between Moscow/Sheremetyevo and western Europe via Riga. It also offers five weekly flights to London/Gatwick and two to Paris/CDG. The carrier connects with Transaero flights at Sheremetyevo and operates a two-class B737-200 on dry-lease from its Russian partner.
Karklins believes the carrier has found a niche, which will allow it to co-exist alongside Air Baltic. 'Two-thirds of our passengers are in transit,' he explains and by nightstopping its aircraft in Moscow, Riair offers good connections with Transaero's flights serving eastern Russian and CIS destinations. The time advantage more than compensates western European-bound passengers for the stop in Riga. 'We were close to break-even in 1995 and expect profits in 1996,' continues Karklins. Loads out of London are particularly strong, but are threatened by Transaero's longheld ambition to operate Moscow-London in its own right. Yet Karklins feels he can survive on London even if Transaero gets its UK licence, and he wants to add a Moscow-Riga-Rome connection plus a Riga-Larnaca service with the latter aimed at point-to-point leisure traffic.
Latvia's surfeit of airlines, which include Yak-40 scheduled operator Transeast, air taxis, cargo and charter operators, is a legacy from the days when it was a major aviation centre in the former Soviet Union. The situation in the neighbouring Baltic states of Estonia and Lithuania is more rationalised with a flag and regional carrier in each.
Privatisation of the state-owned airlines is not on the current agenda in Lithuania, where flag carrier Lithuanian Airlines was the first Baltic carrier to acquire a western aircraft - a leased B737-200 - in December 1991.
The carrier received a boost in mid-May when it entered a marketing alliance with Finnair. The most immediate effect will see capacity in the Vilnius-Helsinki market more than double in mid-August with Lithuanian coming onto the route with two weekly frequencies under a codesharing agreement with Finnair. At the same time, the Finnish flag carrier will raise its weekly flights from the current two to three. The two carriers will also sell each other's connecting flights and will cooperate on ground handling and traffic planning.
Lithuanian operates three B737-200s, two Tu-134As and eight Yak-42s from its base at Vilnius, while regional Air Lithuania operates one Tu-134A and six Yak-40s from Kaunas, the country's second city and pre-war capital. Both carriers are also developing services from Palanga on Lithuania's Baltic coast.
In Estonia, meanwhile, privatisation is well underway and final bids for 66 per cent of Estonian Air were lodged on 9 May. General director Toomas Peterson says the privatisation initiative has three goals: 'Firstly, to provide capital, secondly to find a strategic partner because we have such a small market here, and thirdly to preserve a national carrier in Estonia.'
Estonian Air has worked hard at restructuring since it was created out of the local Aeroflot directorate in December 1991. Unprofitable domestic routes have been dropped, non-core activities like the airport hotel and medical centre put up for disposal, the fleet rationalised and staff cut. The total headcount should reach 350 by the end of this year down from 550 in 1994, with marketing the only department to escape cuts.
Yet financial problems overshadow the carrier. Revenues more than tripled between 1992 and 1995 against an overall 10 per cent increase in passenger numbers (see table). But profitability remains elusive and the carrier was recently hit by allegations of financial irregularities linked to the sale of old aircraft, the employment of consultants and the use of staff tickets. A police investigation is underway, but management has strenuously denied all the allegations.
Peterson puts last year's EEK26 million (US$2.28 million) loss down to the cost of introducing B737-500s to replace Tupolev 134As and is forecasting a reduced EEK10 million loss this year. 'We had to make this investment,' he says, 'but I think we will make money in 1997.' The new aircraft are on five-year leases from ILFC with the first entering service in July 1995 and the second this February. Their running mates are three refurbished Yak-40s, but Peterson would like to replace the small trijets with two 70-seaters.
Estonian Air's scheduled network now links Tallinn with Amsterdam, Frankfurt, Hamburg, Helsinki, Kiev, London/Gatwick, Minsk, Moscow/Sheremetyevo, Stockholm and Vilnius. Instead of further network expansion, the focus is on increasing frequencies, but Peterson plans to add more eastbound routes over the medium term.
The carrier also operates regular charters to Dubai, Larnaca and Malta and naturally supports the Estonian Tourist Board's drive to develop higher yield inbound traffic. Over 90 per cent of tourists are daytrippers travelling by ferry.
Estonian Air's privatisation has attracted the attention of a number of foreign companies. A decision is expected in early June. Although the Estonian Privatisation Agency is debarred from naming bidders, three have identified themselves.
Maersk Air is bidding with Estonian investment company Baltic Cresco, and is rumoured to be the front runner.
SAS has formed a consortium with Tallinna Pank and pulled in the Danish and Swedish funds for investment in eastern Europe again. The Scandinavian major says its offer is worth US$20 million.
BIUSA has gone it alone and put in its own bid. BIUSA's president of aviation, Tom Glenister, confirms that the company has submitted a final bid but declines to give details or name its local partner.
While BIUSA has airport catering and airline interests in neighbouring Latvia, and Maersk Air has aircraft commonality with B737-500s, SAS clearly offers greater network benefits. However, considerations of national pride may favour the other bidders if SAS insists on management control. The Latvians had to concede this when Air Baltic was created, but the Estonians see themselves as being in a stronger position as they are privatising a going concern.
If it is successful, SAS has already stated it intends to explore cooperation between Estonian Air and Air Baltic. This point, not surprisingly, is picked up by Air Baltic's Fredheim: 'We think that the only way to have a viable airline is cooperation between the Baltic countries, but we have to appreciate that the countries only regained their independence five years ago.'
One likely contender, Finnair, did not bid, demonstrating that its preference for marketing cooperation outweighs Finland's cultural and economic links with Estonia. The Finnish carrier's position was further underlined by the recent deal with Lithuanian Airlines.
Moreover, feeding a hub as close as Helsinki is never going to be as commercially attractive to the Estonians as operating to more distant connecting hubs.
Once the dust has settled, independent regional and charter operator ELK Airways would like to talk about cooperation on thinner routes with Estonian Air. ELK has its origins in the turbulent days of early independence when Estonia was faced with the delivery of two Tupolev 154Ms, which the management setting up the new flag carrier did not want to accept. ELK was set up to operate the aircraft with contracts from Baltic, Russian and Ukrainian shipping companies to fly crew-change charters for fishing vessels. These charters have now been replaced by inclusive tour/shopping charters and wet-leases.
ELK now has four Tu-154Ms and has launched regional schedules from Tallinn with two Let-410s to Turku and Riga year-round plus a seasonal service to the island of Kärdla. The private company is profitable, according to president Aleksander Beloussov, and is majority-owned by Estonian nationals. Beloussov himself is a Russian who has applied for Estonian citizenship.
Beloussov wants to open new scheduled routes from Tallinn to Moscow, which only has three flights a week now, and to St Petersburg and Kaliningrad, which currently have no service.
Cooperation between the two Estonian carriers is still an open question as much as the issue of wider regional cooperation between the flag carriers. The three Baltic states support an annual air travel market of some 1.25 million passengers so survival could depend on rationalisation. SAS's management presence at Air Baltic should ensure the Latvian carrier leads the way in adapting operations to the local conditions. A successful bid by the Scandinavian carrier for Estonian Air could speed up any regional rationalisation. But the strong sense of national identity in the fledging democracies may yet stand in the way of economic rationale.
Source: Airline Business
