Three years ago Air Baltic posted record losses and was suspected to be the next Flag Carrier to fail. Today Air Baltic is one of the very few European success stories. Max Oldorf talked to Martin Gauss, former CEO at DBA (Deutsche BA) and Malev, now CEO at Air Baltic about what it takes to reanimate a dying airline.
Air Baltic – Airline Information
Air Baltic – Aircraft and Fleet List
Air Baltic – Airline Route Network
Air Baltic has recently been through a very rough patch culminating in a major restructuring program. How did it perform in 2013?
We are going to publish our [2013] results at the end of March. While we had originally anticipated a multi-million euro loss, it now appears our figures are going to be far better than expected.
Three years ago Air Baltic was in trouble and faced possible closure. What has changed since you joined the company?
Well back then, I was asked if I would like to take over the management of an airline in dire straits and if so, what would I do to rescue it. So, I presented four different restructuring options to the airline’s shareholder – the government of Latvia represented by the prime minister and his cabinet – and told them which one of the four turnaround plans I personally preferred and what each would cost. All four proposals varied both in terms of overheads and depth of cost-cutting measures. In the end, we settled on a plan – my own preferred option in fact – which although not the cheapest to implement, was not the hardest to undertake in terms of restructuring either. Once we had settled on a way forward, we brought in Boston Consulting to help us iron out the finer details. In addition, I also brought in people I could trust. In my opinion, it was the plan which could deliver the results the airline needed over the ensuing three years, and it has certainly paid off.
Given the chance, would you do it the same way all over again? For example, you abolished your business class at first only to reintroduce it later.
Like any restructuring plan, I had a checklist of sorts involving hundreds of tasks to be undertaken. However, it is only when you actually implement a policy that you sometimes discover that it would be best to maintain the status-quo. This was the case with our Business Class. Whereas the previous administration’s plan had focused on growth, ours concentrates on improving yields and therefore profitability which, I might add, we are learning to do rather successfully.
Air Baltic Boeing 737-500 taking off at Zurich Airport – © Tis Meyer / planepics.org
The Latvian government has poured a lot of money into the company. Are you afraid that the European Commission (EC) may force Air Baltic to pay back the subsidies as in the case of Hungary’s now defunct carrier, Malev?
Malev was a completely different case. When I joined the airline, the EC had already investigated the case and a year prior to the closure, it was more or less clear that we would be forced to pay back the subsidies. However, despite strong operating results and a positive EBIT (Earnings Before Interest and Taxes), Malev would never have been able to repay the funds. It was then that I decided to leave the airline. In Air Baltic’s case, it is still not clear as to whether or not government has provided “state-aid” in the strictest sense.
When the airline needed a cash-injection, both the private shareholder and government (as the second shareholder) decided to increase its share capital. However, when it was discovered that the private shareholder was no longer able to provide the necessary funds, there resulted in two possible courses of action: either the capital drive be abandoned or government intervene on the private investor’s behalf. Given the gravity of the situation, the latter option was taken. It was then that the EC launched its investigation. Hopefully, the EC will agree with our position that government acted in a normal capacity as an ordinary investor but if not, the financial impact will be manageable. Quite honestly, I am confident about the outcome.
How sustainable is the actual turnaround plan? Comparatively speaking, what are the primary differences between your current approach and the old one?
Well, the old strategy focused primarily on boosting growth using very low fares to lure as many passengers as possible. The problem with that approach was that despite growth occurring, no one bothered to keep tab of the costs incurred to make said growth possible. This resulted in fares on some routes being either too low or too high.
In contrast, our current plan has focused on reducing capacity and altering our pricing structure. Over the last few years, we have terminated several loss making routes and enforced a benchmark that all new routes have to turn a profit within a year of their first launch.
How do you price your flights?
We use a system developed by Lufthansa. Essentially, our fares are priced according to routing and point-to-point. For example, if we can offer a convenient flight connection with a stop in Riga, then this route is priced separately. Furthermore, ancillary revenue is very important for us and makes up for a significant percentage of our total passenger revenue.
Picture from the past. Air Baltic’s Boeing 757-200 are now on dry-lease at Royal Flight – © Tis Meyer / planepics.org
Your two Boeing 757s are not currently used on the Air Baltic network. Will they return at some point in the near future?
Currently they are on sub-lease to Royal Flight and have been painted in their livery. Though Royal Flight does not use them, they are airworthy. However, while we are currently making a loss on the two B757s, the loss is less than if the two aircraft were in use on our network. The plan is for Royal Flight to lease the two jets from the lessor directly once our leasing contract expires.
Are you prepared for possible delays with the Bombardier CSeries?
As a stopgap, we have started to buy some of our current aircraft from their lessors – currently we own five Boeing 737-300s and 737-500s. So, should the C-Series experience delays, we will still be able to cover our operational needs using these five aircraft. In any case, we would ideally need 12 months notice over any possible delays. That would give us enough time to extend some lease contracts. However, I have to say that we have a very good relationship with Bombardier and, just a few weeks ago, they confirmed that they expect delivery of our first CS300 to go ahead as planned in 2015 with a further five due in 2016.
Are you planning to convert any of your C-Series options into orders?
I am not authorized to comment on our options, but I can say that with our current fleet consisting of only thirteen B737-300/500s and with ten CS300s on order, we do have plans to grow once we are profitable.We do not want to make any further cuts in the future.
Air Baltic Boeing 737 at Riga – © Air Baltic
You have recently introduced a free bus shuttle service from Riga to six cities in Estonia, Latvia and Lithuania. Who is footing the bill?
We are and no municipality or government subsidizes it. We use it to boost our presence in these regions as it makes travel much easier for our passengers. Only Air Baltic passengers can travel on these coach services and if the bus or the flight is delayed, we are responsible for finding an alternative flight connection or transport. We had a similar system at Malev and it worked well there.
Are you planning to expand your partnership with Etihad Airways? Whose idea was it initially?
It was our idea to approach Etihad and we are happy that it has worked out. We operate these flights using our service concept and branding while Etihad just adds their flight code.
When we started flights from Riga to Abu Dhabi in December, we did so without much preparation resulting in a lower level of uptake than would normally have been expected. But despite this, we persevered it in order to exploit the winter market. You see, in the beginning, most passengers travelled point-to-point but the number of those traveling beyond has risen rapidly.
All things taken into consideration, we are happy with the outcome. And Etihad is happy with the codeshare as well. One anomaly of the route is that for around two months during the summer it doesn’t really make sense to fly direct [to Abu Dhabi]. In light of this, we are currently evaluating whether to route the flight via one of Etihad’s European hubs – Amsterdam or Milan for instance – or to continue to fly direct during the period. As of this moment, we have wet-leased an Airbus A319 from CSA Czech Airlines for flights due to a lack of suitable aircraft in our own fleet. While the Boeing 737-300 could manage Riga – Abu Dhabi nonstop, the same cannot be said of the return leg given the strong headwinds. The arrival of the C-Series however should change all that.
Previously, Air Baltic offered international flights out of Vilnius. Are you planning to operate flights out Tallinn or Vilnius again at all?
Frankly speaking, both local carriers in Estonia and Lithuania face big challenges, but let us see where they go, as any decision taken on whether to begin these flights would hardly depend on the development of those two carriers. However, from our point of view, we still carry a lot of passengers from Lithuania and Estonia through our hub in Riga so there is potential on some routes. Furthermore, while we will only commence flights if we are certain they will turn a profit, we also have to make sure that no new routes negatively impact the number of passengers transiting via our Riga hub.
Air Baltic Bombardier Q400 at Oslo – © Tis Meyer / planepics.org
Ryanair and Wizzair are considering serving more central airports from Riga in the future. How would that impact your business?
Well, since nearly all our central routes are flown in competition to a low cost airline, any move to serve more central airports on their part will likely lead to added price pressure. But given that price pressure in Latvia is already very high, I expect us to manage it. On other [less central] routes, we mostly operate on a high-frequency basis using turboprop aircraft. An example of this is our routes to Oslo or Stockholm. Unlike low-cost carriers which can only offer a few weekly flights, we are able to offer multiple-daily frequencies thereby forcing business travelers to choose us. And even the higher per-seat costs associated with the Bombardier Q400 NextGen do not matter because we rotate aircraft types in according to demand.
An example would be our Riga to Tallinn and Riga to Munich services. If both flights are well booked, we deploy a Boeing 737 to both destinations. If only the Munich flight is satisfactorily booked, then we only send a Boeing to Munich. If neither flight is adequately filled, and we only have one Boeing 737 and one Q400 available, then the smaller aircraft is deployed on the longer route. Our fleet makeup allows us a lot of flexibility in terms of equipment choice and because of that, our overall costs are kept low.
Wizzair and Ryanair are both very active in Eastern Europe. Which carrier is more dangerous in your eyes?
Both carriers present challenges, but they do have their differences. For example, while Ryanair is a lot cheaper than Wizzair, it will abandon an unprofitable route a lot sooner than Wizzair will. But we shouldn’t focus too much on competing against them. Our real challenge will come from Russian airlines whose use of large B737s on Moscow – Riga flights will give them a much lower cost base. Moscow is a very important market for us but unfortunately the competition is now becoming more and more active.
In the long run, can Air Baltic continue to exist without a big partner airline?
Even with its current size, Air Baltic has been able to operate independently for a couple of years now. When I started, the first target the airline’s owners set me was to stop bleeding money. We have now reached that goal smartly using the resources available. But, what we wouldneed is an external partner to finance our CSeries order. Given that the contracts have excellent conditions, there might be interested parties. In any case, our current owner is unlikely to finance the aircraft so we will need a sale-and-lease-back plan or an external investor at some point.
So to answer your question, Air Baltic could, at some point, need a strong partner but before that can happen, the government has to decide what their future plans for the airline are and whether or not they want to sell it.
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Martin Gauss with a Boeing 737 model – © Air Baltic
Mr. Gauss, we’re told you’ve been given the nickname “Firefighter” as a result of all your previous experience with restructuring loss-making carriers. Is this true?
(Laughs) I’m afraid so. But I haven’t adopted it…
Do you ever have the desire to go and work for a robust and sustainable airline?
No not really. My private life is perfectly suited to the role of a “firefighter”. You see, my family and most of my friends live in Munich and I have a well organized social life there that can be handled with limited effort. That’s why I commute a lot between the two cities (Riga and Munich).
I cannot imagine permanently moving with my family to another city let alone a country. Actually at the moment, because the turnaround at Air Baltic has worked out, I find myself thinking about what’s next up to come. I am not the type to sit around and grow old in a specific company and I have no problems with leaving a company once my work there is finished. I was at DBA (Deutsche BA) for 12 years until things turned around. After it was sold, I moved on with no regrets.
Despite your hand in the business’s turnaround, one often only hears the name “Hans Rudolf Woehrl” mentioned in relation to the successful restructuring and sale of DBA to Air Berlin. How do you feel about that?
I am absolutely fine with that. Woehrl took a risk in buying the company under his name. He then took an even bigger risk in appointing Peter Wojahn and me as directors. Lastly, his biggest risk was selling the company – us included – to Air Berlin. All in all, it’s the owner who takes the risks and makes the decisions and therefore it is he who deserves the credit. In that case, it was Hans Rudolf Woehrl and I personally have no problem getting less recognition than he for my own work. Normally if you do a good job the recognition comes from that and in all honesty, I actually prefer not being in the spotlight as it then means I can still enjoy my private life.
Air Baltic Boeing 737 at the maintenance hangar – © Air Baltic
So that pretty much means becoming the new CEO of Lufthansa wouldn’t be that appealing to you?
I always answer this question with the old saying – “Stick to what you know best.” In fact, it is a completely different task altogether. To master such a job, you would have to be as qualified as Carsten Spohr is. He has been at Lufthansa and its subsidiaries for many years and knows its structures very well. He is also at the perfect age for it and has a network that he can rely on. So from my point, he is the perfect man for this job and to bring in another airline manager to replace him should only be done so as a Plan B. While I don’t know Carsten Spohr very well, when I look at what he brings to the table, and considering the rough patch Lufthansa is going through, he is the perfect choice and I wish him the best of luck and success.
So you cannot imagine yourself running a big multinational company?
I don’t think anyone sees me as the boss of a multinational company. They more likely see me as the guy that gets the job done. But never say never. Up until today, whenever I have left an old job, I have had no clue what is next to come.
How do you live with that uncertainty and do you sometimes wish you could be in a completely different industry sector?
Actually I cope with it very well. I have never been afraid of not finding another job. In fact, it was always the opposite and even though I am 45, I still have a few years of work left in me.
Regarding your second question, I would be very glad if one day I could compare how my knowledge of turning around airlines, when applied to other industries, performs against that of those industry’s professionals. For example, within the automotive industry, would an airline manager achieve the same or better results there because the airline industry is so competitive, or would he fail because in actual fact, the automotive industry is the tougher market to survive in? That’s a question that would really interest me but up until now no one, unfortunately, has come to me and asked if I would like to take on an automotive company. (laughs).
Picture from the past (2006) DBA (Deutsche BA) Boeing 737-300 at Hamburg – © Tis Meyer / planepics.org
Where do you see yourself in five years?
I haven’t really thought about that just yet. In my private life certainly, but when it comes to work, I would simply like to have an interesting job. Thanks to the DBA deal, I am very fortunate in that I can operate independently and thus focus on my own success. That’s probably why I am only attracted to jobs where I see the possibility of my success shining through and if I could see myself being successful [in that role]. That will always be the key driver in my choice of what I do next. I probably see myself as being more successful than the shareholder in that current situation does. That’s how it was at Woehrl/DBA, at Malev and at Air Baltic; they thought it would be impossible to change the status quo given the political and economic situation. But I have to admit that it has been a completely different experience at Air Baltic compared to DBA. Back then, for example, there wasn’t any social media at all so it was a completely different ball game.
Our final question is one we got on Facebook: Do you have any plans to resume the Dublin route?
Well, as long as Ryanair serves the route it makes no sense for us to relaunch our Dublin services. However, we have just opened Riga-Aberdeen which keeps our aircraft busy. So while Dublin is a leisure and workers route only, Aberdeen is an oil route that connects with Baku (in Azerbaijan). Aberdeen only makes sense because we serve Baku as well.
Thank you for the interview!
Air Baltic – Airline Information
