The fate of Latvia’s national airline airBaltic could very well be decided as early as this Monday. The company has a business plan in place; now it remains to be seen what its bondholders will say on Monday. BNN asked Filips Rajevskis, political scientist and co-owner of the company Mediju tilts, what is really happening with airBaltic.
“The priority of the new business plan is to restore the company’s ability to make a profit, cut costs, reduce the number of aircraft and make a range of other changes. In any case, this currently requires government involvement. The business plan indicated that around 225 million euros would be needed in borrowing for the transition period, followed by another 100 million euros in additional capital. For the business plan to start working, they will have to approach the government,” Rajevskis says.
BNN noted that the airline’s core group of major creditors consists of international airBaltic bondholders, banks, leasing companies and others with whom the company will have to reach an agreement. Rajevskis says this is always a dilemma for lenders.
“In restructuring situations like this, lenders face a choice. They can take a hard line and say: give us our money back. But if the company cannot pay, they have to join the queue with all the other creditors, and there is no telling how much they will ultimately recover. The other option is to make concessions in some areas while still remaining in a fairly comfortable position in terms of returns. Moreover, they have already earned well from bonds carrying very high interest rates. Reaching an agreement with lenders in a situation like this is the highest form of negotiation.
It requires experience and an understanding of how lenders think.”
The airline’s business plan paints an attractive revenue trajectory – from 800 million euros in 2027 to 1 billion euros in 2031. Asked whether this is realistically achievable, Rajevskis replies:
“The prime minister has said in his videos that we need to look at things realistically. We cannot see which passengers they are talking about or which destinations they intend to serve. That makes it difficult to assess. But these are very impressive figures and very ambitious projections.”
Asked by BNN whether airBaltic can actually deliver on this plan, Rajevskis says several factors must be taken into account. “If, for example, airBaltic were to go bankrupt, it would be an enormous loss for the Latvian state. Looking at the worst-case scenario, it would be a huge blow to our economy and to the country’s image. That would be a very bad outcome. On the other hand, continuously supporting the company financially is not easy either. These are complicated decisions. We also have to look at how much airBaltic’s own management and the state as shareholder are prepared to contribute.
All of this comes down to negotiations.”
The airline’s plan also envisages reducing its fleet from the current 54 aircraft to around 36 by the end of the year and returning surplus aircraft to their owners – the lessors. This, too, is likely to involve additional costs.
According to Rajevskis, this creates an extremely difficult dilemma not only for airBaltic’s management and supervisory board, but also for its shareholder – the Latvian state. These are difficult questions, he says, particularly given how challenging such decisions can be to push through the political process.
Asked at what point airBaltic’s business actually went wrong, Rajevskis argues that part of the problem lies with the state itself. As shareholder, it failed to exercise sufficient care and oversight both during the era of Bertolt Flick and under Martin Gauss.
“Now we are reaping the consequences of that carelessness.
Being a shareholder and participating in the governance of a company like airBaltic requires knowledge and understanding. It appears that the state has treated its own company rather casually.”
Asked to comment on the airline’s new business plan, Rajevskis says the situation has both objective and subjective elements. “The objective part is that the business model of flying from Latvia to Western Europe in one direction and to Russia, Belarus and various Eastern countries in the other was a good idea. Who could have imagined that Russia would start a war? The risk existed, and it materialised. You cannot say it was completely unforeseeable, but the approach was to try to live with that risk. The same applies to Covid. Nobody could have predicted that a pandemic would begin, airlines would be unable to fly anywhere for a long period and would simply keep spending money. Those are objective problems.
The question is what happened after those major changes had already taken place, particularly regarding the eastern market. As a shareholder, I would have demanded a revised business plan: what do we do when there is a war and we can no longer fly east? Should we reduce the scale of operations and avoid acquiring so many aircraft? I am not an aviation expert, but there is a sense that these questions were not asked in time.”
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