The three Baltic States of Estonia, Latvia and Lithuania will celebrate the 10th anniversary of their independence this year. In the aviation arena, independence has brought with it a crumbling and unwieldy Soviet aviation infrastructure, along with a motley collection of ageing aircraft from the former local directorates of Aeroflot.
As a result, the early years have been a struggle for the nascent states' flag-carriers. This struggle taught the three governments that it was unlikely they would be able to run profitable airlines on their own and prompted them to take the novel step of looking to the West, rather than the East, for help.
In Latvia, Latavio took over the Aeroflot structure and fleet and became the national carrier, although a more Western-orientated airline, Baltic International, was also set up with US interests to serve Western Europe. Neither, however, proved successful, and in 1995 the Latvian Government took the courageous decision to close Latavio and start anew from scratch without burdening a new flag-carrier with debts, bad habits and an old Soviet fleet. SAS Scandinavian Airlines was asked to help and paid Lat8.7 million ($14 million) for a substantial stake in Air Baltic Corporation (airBaltic), now 34.2%. The Latvian Government remains the majority shareholder with 52.6%. The remaining shares are held by the Denmark Investment Fund for Central and Eastern Europe, Swedfund and the private Russian airline Transaero.
According to air Baltic president Kristian Kirchheiner, SAS had three reasons for taking part in the new Latvian flag-carrier. First, it wanted to secure its home market by keeping others from acquiring a foothold in the Baltics. Second, it aimed to ensure feed into its hubs at Copenhagen and Stockholm. Third, it wanted to use Riga as a mini-hub into Russia.
It has succeeded in the first two aims, but the failure of Latvia to reach an air service agreement with Russia has thwarted the third. Kirchheiner admits: "Seen from an investment point of view, it has not been a success."
In spite of starting with a clean sheet, airBaltic has so far been unable to make a profit. Kirchheiner gives three reasons why it has racked up losses totalling Lat23 million up to the end of 2000. The start-up costs were very high, he says, with large sums spent on retraining old Latavio staff and training new employees. This was compounded later by the Russian financial crisis, which brought the Latvian economy to a virtual standstill, and coincided with airBaltic making a big investment in a short-lived service to Russia in association with Transaero. Thirdly, says Kirchheiner, the transition from Saab 340s to Fokker 50s pushed the airline's costs up considerably. He is confident, however, that airBaltic will break even this year, which would allow SAS to begin recouping its investment.
Until at least 2003, the fleet will remain at three leased 50-seat Fokker 50 turboprops and three leased 70-seat BAE Systems RJ70 regional jets, one of which has been subleased for a year.
Last September, airBaltic extended the lease of the RJ70s for a further two years to 2005. Kirchheiner says this transaction must be viewed in context of the recent order for five RJ85s by Air Botnia, the SAS-owned Finnish regional airline. As well as offering co-operation on maintenance and spares holdings, this arrangement also presents the possibility to swap aircraft when needed, says Kirchheiner, adding that discussions are already under way. He cites Riga-Copenhagen as one route where this could be applied, because 70-seaters are becoming too small. Such an agreement would also allow the RJ70 to be switched to another prime route, Riga-Stockholm, where the turboprop Fokker 50 is no longer considered suitable following the recent takeover of the route from SAS.
Kirchheiner says future fleet plans will depend largely on when the three Baltic states sign up to the European liberalisation package. This should bring more possibilities, both in terms of opening new routes and taking over new routes from SAS. But Kirchheiner stresses that any new route would be operated only in co-operation with a major partner, and to a friendly hub. Vienna, Munich and Kiev are likely choices.
In the longer term, airBaltic wants to fly to St Petersburg and revive the Moscow link that was terminated last year when Transaero defaulted on its contract. But it needs to find another partner, such as Aeroflot, to regain access to Russia. With a fleet of six aircraft and routes to just seven cities (Copenhagen, Stockholm, Frankfurt, Budapest, Kiev, Vilnius and Tallinn), airBaltic has not yet reached a size that could sustain it into the future, says Kirchheiner. It clearly pins its hopes on opening up the European market to extend its business.
Out of the shadows
Although Estonian Air also struggled in the early years, burdened by the Aeroflot legacy, today' s airline bears little resemblance to the carrier that was founded in December 1991 soon after independence. The break with the old Soviet system began in earnest in December 1995 when the Estonian Privatisation Agency decided to offer two-thirds of the airline to a foreign strategic partner.
The deal was effectively completed in September 1996, when Maersk Air acquired a 49% stake and took over the management of the Estonian flag-carrier. Maersk's partner in the successful bid, the Baltic Cresco Investment Group, took the other 17% on offer. The linking of Estonian and Denmark's Maersk made sense because, of the Baltic states, Estonia has always had the closest ties with the Nordic nations, both culturally and linguistically.
Maersk Air's interest in Estonian Air offered it an opportunity to expand outside its limited home market, where "it operated mostly in the shadow of SAS", says Estonian chief executive Jørn Eriksen. Maersk Air was previously associated with British Airways and Finnair. Its ultimate and more logical re-alignment with SAS and the Star Alliance raised the ire of Finnair, which immediately cancelled its codeshare agreement on the Helsinki-Tallinn route, which Estonian Air has now stopped flying altogether. The Estonian carrier now feeds SAS at Copenhagen and Stockholm, and also flies to Frankfurt, London Gatwick, Hamburg, Moscow, Kiev, Vilnius and Riga.
On top of the original investment, Estonian Air has been restructured and, as at airBaltic, shareholders have yet to see a return on their money. The Russian crisis, high fuel prices and the strength of the US dollar have all hampered financial progress. But Eriksen says the airline will break even in 2000 on expected revenues of EKr700 million ($42 million), although he refuses to reveal the extent of the losses accumulated since 1996.
When asked what Maersk Air has accomplished in Estonia in four years, Eriksen points out that Estonian now operates to the same standards as Maersk and other high-quality European airlines. "But I would like to emphasise that what we have achieved has been very much in co-operation with local staff," he says. Apart from Eriksen and the vice-president for finance and administration, all senior managers are Estonian. This is in contrast to airBaltic, where the SAS contingent is more prominent, and where the Scandinavian consortium has a 10-year right to choose a large number of board members, including the president.
Eriksen describes as "premature" reports that Estonian Air will replace its entire fleet with four Bombardier CRJ-200 regional jets in 2001. The lease through ILFC of its two 107-seat Boeing 737-500s still has four years to run, and although the two 48-seat Fokker 50s leased from Maersk will be phased out in the next 18-24 months, their replacement with the CRJ-200 is only one option, he says. The first priority is to increase frequencies, says Eriksen, which can be achieved with the four existing aircraft, before considering expansion. There is already a need for a 70-seater aircraft, particularly on the main routes to Copenhagen, Stockholm, London and Frankfurt. The acquisition of a CRJ-700 is the most likely outcome of a fleet renewal, although again Eriksen insists this is only one of several options.
Progress in Vilnius
Lithuania has stumbled in its attempt to align Lithuanian Airlines more closely along Western lines. But it has almost completed the transition to Western aircraft, and now operates three Boeing 737s, two Saab 340s, two Saab 2000s and only two Yakovlev Yak-42Ds.
A surprise change of government, however, has once again thrown plans for Lithuanian into turmoil, and cast doubts on the most recent, and third attempt to privatise the carrier. Company head Kestutis Auryla, appointed in March 2000, says a clearer picture of the airline's future will not emerge until spring 2001.
That said, there are voices in the country calling for the flag-carrier to be closed down, finally drawing a line under the Soviet era, and for it to start anew with an entirely Western orientation. With the carrier already having gone some way along the modernisation route, a strategic airline partner would push that process to its conclusion. KLM has been mentioned most recently as a likely candidate, but SAS and Maersk Air will also keep a close eye on the government's next move. Should either buy into Lithuanian Airlines, it could be the beginning of a major rationalisation for the Vilnius-based carrier.
| Baltic states airlines annual passenger numbers | |||||
|
| 1996 | 1997 | 1998 | 1999 | 2000 |
| airBaltic | 106.300 | 151.400 | 173.652 | 194.224 | 216.548 |
| Estonian Air | 472.000 | 216.000 | 280.000 | 269.000 | 285.000 |
| Lithuanian | 229.000 | 225.800 | 210.000 | 200.000 | 244.000 |
| Baltic states airlines annual turnover ($millions) | |||||
|
| 1996 | 1997 | 1998 | 1999 | 2000 |
| airBaltic | 23 | 36 | 38 | 38 | 42 |
| Estonian Air | 22 | 22 | 30 | 34 | 43 |
| Lithuanian | 47 | 50 | n/a | n/a | n/a |
SAS in miniature?
The creation of a trinational airline covering Latvia, Estonia and Lithuania has been discussed endlessly, but the idea invariably founders on issues of nationalism. Unlike the three Scandinavian countries participating in SAS, the three Baltic states are very different in culture and language. Equally problematic is the gap in the level of evolution: Estonia is probably the most advanced, followed by Latvia and then Lithuania. As for the airlines, although there is little separating Estonian Air and airBaltic, Lithuanian Airlines is still government-owned and comes with Soviet baggage.
But even so, Kirchheiner believes it makes sense to co-operate. He says his company's name illustrates his commitment to this goal: "We are called airBaltic and not Latvian Airlines, which indicates and symbolises our ambition."
As to the form such a multinational airline would take, Kirchheiner says it should not necessarily be limited to the three Baltic states, but could include regional carriers from Sweden and Finland. "At some point, I could easily imagine that we could have still closer co-operation (with Estonian Air)," he says, although his enthusiasm is not shared by his counterpart in Tallinn.
"I do not expect to see a pan-Baltic airline," says Estonian's Eriksen. "It would be more a business co-operation that would benefit all three, because all three countries are limited in terms of market size."
Estonian and airBaltic currently codeshare between Riga and Tallinn and operate joint offices in several cities, but Eriksen is quick to point out: "Our co-operation with SAS is more far-reaching than that with airBaltic."
There is also a noticeable schism between the three countries' home-base airports of Riga, Tallinn and Vilnius. All three are vying for hub status but, says Kirchheiner, the discussion about which of them will become a hub is academic. "It is not a matter of whether Riga, or Tallinn, or Vilnius will become a hub, it will be which Scandinavian city the airlines will choose as their hub," he says, "because our hub today is Copenhagen, which is also the hub of Estonian Air. Estonian Air does not fly via Riga, because not every major European city is served from Riga and, for the same reasons, we do not feed traffic through Tallinn."
Kirchheiner does not dismiss the possibility of Riga becoming a mini hub - for example, for services to Russia, Belarus and Ukraine - but he agrees that it makes no sense for these destinations also to be served from the other two Baltic capitals. Eriksen says Tallinn could serve as a transit hub for services from Kiev to Copenhagen and Stockholm.
No matter what the outcome, there is no doubt the region's airline sector has used its ties with the West to advance considerably in the past 10 years. Airports upgraded
Much as the region's airlines have been reforming at a rapid pace, so too have the Baltic airports, each of which has received funding assistance from the European Union.
Riga, Latvia
Arrivals area has been completely revamped New concourse is under construction for completion by summer 2001 Fast runway exits and Cat II compliant runway lighting are plannedTallinn, Estonia
Has spent nearly $70 million in facility modernisation, including: Renovation of the passenger terminal to raise annual capacity to 1.5 million passengers Runway reconstruction A new cargo terminal Fire rescue centre and other security featuresVilnius, Lithuania
Passenger terminal has been reconstructed, with new check-in counters, passenger boarding bridges, a business lounge and retail areas Refurbishment of taxiways Extension of the runway to 3,000m (9,800ft) Plans for Cat II landing capabilitiesSource: Airline Business
