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Gaining Altitude: Feature Title Here Airline Interview

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Featureinterview

Airline title here

Gaining altitude
Martin Gauss is a man who understands only too well the perils of running a state-
owned airline and now, as CEO of airBaltic he explains to Martin Rivers how lessons
from the past can build a vibrant, forward-looking carrier

I
Half of the airline's
n 2012, shortly after Martin Gauss stepped down Whereas MALV relied on subsidies from its government
passengers are transferring as CEO of MALV Hungarian Airlines, the European owner to stay afloat violating competition laws in the
through the Baltics
(all photos: airBaltic)
Union ordered his former employer to repay 130 process airBaltic deployed private-sector efficiency
million of illegal state aid. Unable to do so, MALV, one of and commercial sustainability to get its house in order.
Europes oldest flag-carriers, ceased operations. The EUs two-year investigation failed to unearth any
Its demise came just three months after Gauss had wrongdoing by the state-owned carrier, clearing the way
agreed to steer another troubled eastern European for a bold new future in Latvias picturesque capital of Riga.
flag-carrier: airBaltic. Within one year, history was "We did it the right way," Gauss says with a smile,
repeating itself and Brussels was launching a new recalling his 2012-16 ReShape restructuring programme,
investigation into the Latvian airline. The similarities, which nursed the airline back to health by slashing costs
however, end there. and cutting routes.

36 / Low Cost & Regional Airline Business www.lowcostandregional.com / April 2017


Airline interview


With three years of profitability now under his belt, The growth which we have put in Horizon
the time has come to once again pursue growth, and
Gauss is doing it in style; winning headlines across
2021 could only start in April 2016, because
the globe by making airBaltic launch customer for we were limited to the restructuring plan
the Bombardier CS300. Two of the next-generation
aircraft landed in Riga in late 2016, while another six
are expected this summer, lifting seat capacity by 16%
[approved by] the [European] Commission

across the network. in Russia, Madrid in Spain, Odessa in Ukraine, Geneva in
The launch of a successor business plan Horizon Switzerland, Aberdeen in Scotland, Stavanger in Norway,
2021 has meanwhile seen management step up the Gothenburg in Sweden, Tampere in Finland, and Catania
hunt for a strategic investor, which Gauss considers vital in Italy. Vilnius will meanwhile be linked to Paris in France
amid wider industry consolidation. He is also staging and Munich in Germany.
a comeback in Lithuania and Estonia, resurrecting The evolution of the fleet will be no less dramatic,
airBaltics vision of being a home-carrier for the entire with airBaltics 13 Boeing 737 Classics gradually being
Baltic bloc. retired as the CSeries takes over. This years six CS300
"The growth which we have put in Horizon 2021 deliveries will be followed by another eight in 2018 and
could only start in April 2016, because we were limited four in 2019 completing the 20-aircraft order. Twelve
to the restructuring plan [approved by] the [European] existing Dash 8 Q400s will also remain in service.
Commission," Gauss explains. While Gauss wants the last Boeing to retire in 2019,
"There were many conditions [laid down by Brussels]: he is not committing to a one-in, one-out transition.
we had to give up 16 profitable routesWe had an ASK airBaltic owns nine of its 737s outright, and by keeping
[available seat kilometre capacity] limit. We had to bring some on standby the company will have flexibility to
in our own [financial] contribution. We had to bring add extra capacity or offset technical issues during the
in a private investor [Ralf-Dieter Montag-Girmes, who CSeries roll-out.
acquired 20% of airBaltic in February 2016]. So we did all airBaltics public expression of interest in buying
of it, we ticked everything off, and we started Horizon two more jets raising the fleet target from 32 to
2021 as a five-year business plan for when ReShape was 34 units by 2020 is another factor in the flexible
finished. Now we already know what we are going to do retirement programme.
beyond 2021: we are going to have Sunrise 2026." "We are now in the process of revising the plan to
Gauss is decidedly upbeat when discussing this years 22 jets and 12 turboprops, because we see demand
expansion, highlighting the launch of nine new routes for more of the bigger aircraft," Gauss confirms.
from Riga plus two from Vilnius, Lithuanias capital. But "Twenty-two jets means we could use two of the 737s
with memories of MALV imprinted in his mind, the for that, or, because we want to get rid of them, [we
Riga-based airline boss takes nothing for granted. could] tell Bombardier we need two more [CS300s]We
have the option of keeping the two Boeings until the A further six CS300s will
Conservative growth right time to, maybe, place another order for CSeries." f be delivered this year
"Im a very conservative person," he insists. "We will only
be back at 2011 [capacity] levels in 2019 or 2020, not
before that. Its a gradual growth back to these levels
with the difference that we are not making 100 million
loss! Thats why we want to do it so slow: to ensure the
profitability throughout."
At the time of writing, the winter 2016/17 network
comprises 33 destinations outside of the Baltics, most
of which are in western Europe and Scandinavia.
Some eastern cities are also served among them
Moscow and St Petersburg in Russia, Kiev in Ukraine,
and Warsaw in Poland as are three peripheral south-
eastern routes to Tbilisi in Georgia, Larnaca in Cyprus,
and Tel Aviv in Israel.
Summers during ReShape typically saw sun spots
like Athens in Greece and Malta join the network on
a temporary basis. However, the growth in 2017 is of
a different nature altogether. Alongside more typical
seasonal additions, Riga will gain new services to Kazan

April 2017 / www.lowcostandregional.com Low Cost & Regional Airline Business / 37


Featureinterview
Airline title here

Though candid about his preference for additional left more cash on the table? Past experience, again,
Gauss (left) says there is the
possibility for two more CS300s 145-seat CS300s, Gauss insists that price is paramount motivated the decision.
to the decision. "I have no negotiating position today "It comes from [our recollection of ] the time when
if [Bombardier] think I need them," he laughs. "Yes, the we had everything leased, and then one wind blows
plan is to add two more jets. But there is no must." against us and the company is in difficulties," Gauss
Notwithstanding these ongoing talks, the chief explains. "While I have all aircraft on the balance sheet,
executive is happy to express his delight with the I could still in a couple of years decide that I want to
newly-inducted aircraft. change something and go for a sale-and-leaseback. Its
Both airBaltic and Swiss International Air Lines, not plannedbut I have that flexibility."
the launch customer of the smaller CS100, have airBaltics recapitalisation in 2016 whereby Montag-
waxed lyrical about the CSeries better-than-expected Girmes invested 52 million in the company, alongside
performance, with per-passenger costs coming in 18% an 80 million government injection was explicitly
lower than for larger re-engined aircraft. Travellers have linked to this risk-management philosophy.
also given glowing reviews of the cabin experience, "We wouldnt have got the money if we hadnt said
citing low noise levels, high humidity, and windows that we will put it into aircraft," Gauss affirms.
are 26% larger than on the 737 Classic. Pressed on the likelihood of airBaltic leasing out
surplus metal, he notes that the flag-carrier already has
Investing in assets a dedicated department to handle short-term charter
The fact that airBaltic is taking all 20 CS300s and wet-lease contracts. Until recently, he expected four
on-balance-sheet shows its confidence in the type. of the 34 aircraft in 2020 to be contracted out, but that
But why invest so heavily in assets at a time when figure could now fall as "we can make more money from
expansion beckons, and operating leases would have keeping them and adding them to the operation." f

38 / Low Cost & Regional Airline Business www.lowcostandregional.com / April 2017


Featureinterview
Airline title here

Its difficult to compete with us because service would be inconceivable until the outlook
improves. As for Abu Dhabi launched in 2013 but
we have half of our passengers transferring


quickly suspended a second attempt this winter will
[through the Baltics] depend on the resurrection of a codeshare deal with
Etihad Airways. If that former partnership cannot be
Speculation about what exactly that operation will rekindled, Doha in Qatar or Dubai in the UAE may be
look like intensified last year, when company slides favoured instead.
published in the media exposed a slew of apparent Ultimately, many of these decisions will need the
route proposals. Among the targets shown on the blessing of the upcoming investor, whose primary
'Outlook 2021' slide were Manchester in the UK, Dublin function is to help airBaltic find "a home in the form
in Ireland, Reykjavk in Iceland, Ekaterinburg in Russia, of a bigger group".
Almaty in Kazakhstan, Istanbul in Turkey, and Abu Dhabi "There is more focus on the strategic part [of the
in the UAE. Most of the destinations have previously investment] than on the equity part, because there is no
been served by airBaltic, mirroring this summers need for fresh capital," Gauss says, describing it as "very
focus on restoring historic routes. However, Gauss says unlikely" that a non-aviation partner will be chosen. "I do
nothing is set in stone for 2018 onwards. believe that there will be a couple of big airline groups
"[We have] a list of 100 or more routes which we in Europe, and you dont want to be standing alone
constantly evaluate," he notes. "We have done a plan where We want to have a strategic partner to ensure that the
weve put some points on the mapbut the decision will consolidation is happening not around us, but with us."
come every year in the business planning process." The government has hired Lazard Frres, a financial
He cites the situation in Istanbul, which is suffering advisory firm, to oversee the sell-off. Both parties say an
weak demand following a string of deadly terror attacks. investor should be found by the end of 2017 a timeline
The Q400s will remain in service Competing with Turkish Airlines existing Istanbul-Riga which Gauss considers realistic, though not binding.

40 / Low Cost & Regional Airline Business www.lowcostandregional.com / April 2017


Airline interview

He declines to give a running commentary on the


process, insisting: "There is no limitation around the
globe on who could be a potential strategic partner. Its
completely openThe best fit will get it, not necessarily
the one with the highest amount."
Until the investor is found, management cannot flesh
out their long-term goals under Sunrise 2026, which will
take the baton from Horizon 2021 in the middle of the
next decade. Making rigid plans so far in advance may
not even be prudent, given the unpredictable nature of
the industry. Still, when pressed on his vision for airBaltic
ten years from now, Gauss does not hide his enthusiasm
for one missing strand of the business.
"In Finland, you have 6 million inhabitants and you
have a very impressive long haul network," he notes. "The
Baltics also have six million people, but zero long haul.
The routes are defined already, so its just a matter of time.
The question is, are we starting it, or is somebody else
starting it?That is something I will always raise when Im
in discussion with potential partners."
Other strategic priorities, meanwhile, have already
been decided by management.

Pan-baltic ambitions
In the route-proposal slide published last year, the capitals
of neighbouring Lithuania and Estonia were shown with
12 and 10 new links respectively. That would mark a
dramatic expansion of the three non-Baltic connections
offered from Vilnius this winter (Amsterdam, Berlin and
Stockholm), and the four from Tallinn (Amsterdam, Berlin,
Paris and Vienna).
"We see the Baltics as our home market not only
Riga," Gauss confirms. "The new business plan says we are
going to offer connectivity from all three Baltic capitals.
We have a target of 400,000 passengers in 2021 from In Vilnius, meanwhile, it is low cost carriers that offer the
Gauss: The time has come to
Tallinn, and 200,000 from Vilnius. strongest competition. Ryanair and Wizz Air each provide pursue growth
"We will and we do cannibalise Riga, but there is one quarter of seat capacity in the capital, versus airBaltics
enough potential from three independent countries and modest 10% share. Their dominance increases when
three business centres to fly direct." Kaunas, Lithuanias second city, is included.
airBaltic has tried and failed to expand in the While airBaltic cannot match the scale of these
sub-region before. Attempts to scale up Vilnius in 2004 pan-European rivals, its low cost base and strong hub
and Tallinn in 2010 were both unsuccessful, prompting synergies create an enviable shield. The first year of
a retreat to the Riga hub by the time Gauss was hired in Horizon 2021 saw the flag-carrier add two percentage
2011. However, the CEO believes circumstances have now points to its market share in Riga, reaching 52.7% of
changed. He cites the recent collapse of Estonian Air and seats. In the same period, Ryanair and Wizz Air shrunk
Air Lituanica, two regional rivals that were hampering the their footprints to 15.5% and 7.7% respectively.
pan-Baltic strategy. "In our business plan there was a slide "All the growth of Riga Airport was driven by airBaltic
saying [we expect] Air Lituanica and Estonian to disappear last year," Gauss emphasises.
by 2017," he recalls. "They disappeared in 2015." "Its difficult to compete with us because we have
Estonias government was quick to form a new half of our passengers transferring [through the Baltics].
flag-carrier Nordica, a joint venture with LOT Polish We will always have a load sitting on board which
Airlines but Gauss is unconcerned by the move. The the low cost carriers will not have. We also have more
operations small-scale nature and apparent reliance on frequencies and more night stopsOur connectivity to
Warsaw for connectivity poses little threat to his point-to- the Baltics is unbeaten, so whoever does something [to
point strategy in Tallinn. compete] will never be as efficient as we are." 

April 2017 / www.lowcostandregional.com Low Cost & Regional Airline Business / 41

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