The biggest and strongest passenger carrier in the Baltic States is undeniably the Latvian national airline airBaltic. It is a major player in the Baltic Sea region, and in terms of passenger numbers it is one of the largest regional airlines in Europe. Both the 2013 and the 2014 financial years have been profitable for airBaltic, but the number of passengers decreased by 6% after significant restructuring. Currently, airBaltic in engaged in continued discussions with investors, as defined in the government declaration.
This summer there were 87 direct destinations from Riga - 50 of them carried out by airBaltic. Although the airline's market share at Riga airport has dropped for three consecutive years, in 2014 it still carried 56% of airport passengers. airBaltic has obvious importance at the Riga airport and its future development.
This yeas has not been a simple one in European aviation. It is greatly affected by the events in Ukraine, Russia's economic problems and the aggravation of relations between Russia and the EU. Both European and Russian airlines have suffered. In addition, European carriers are also suffering from the weak euro exchange rate against the dollar, because the income is in euros while the expenditure is in dollars.
Against this background it would be worthwhile to look at how the competitors of airBaltic are doing. This would provide an additional opportunity to assess the performance of airBaltic and to understand the circumstances in which the investor attraction takes place.
Let's start with Estonian Air that is literally struggling for survival. Since 2012, it lost 38% of passengers, turnover fell last year by 4%, while losses reached 10.4 million level. In addition, the European Commission has not yet completed the state aid investigation launched last year. While in Riga 4.8 million passengers were serviced, in Tallinn the number in 2014 reached only 2 million. This year airBaltic actively increased the number of direct flights from Tallinn, and plans to expand its business even further. In mid-September the Estonian government announced that, in case of negative conclusion by the European Commission and the resulting cessation of operations of Estonian Air, it is considering the creation of a new national airline.
Meanwhile in Lithuania Air Lituanica ceased its activities in May 2015, and airBaltic agreed to take over its customer service. The situation in Lithuania has facilitated airBaltic’s expansion in Vilnius airport. With 2.9 million passengers Vilnius airport is the second largest airport in the Baltic countries.
In 2015 airBaltic started certain expansion in Vilnius and Tallinn airports. AirBaltic has increased both the number and frequency of direct flights offered, and also the frequency of connections via Riga. AirBaltic is developing a firm position in Baltic aviation business and increases competition with other airlines.
LOT Polish Airlines is a relatively big player with 5 million passengers. However, this company is facing considerable challenges as well. In August, a much discussed resignation of its chief executive Sebastian Mikoss took place, during which Mr. Mikoss pointed to the Polish Government's unwillingness to attract private investors. Last year LOT operated with 9 million normalized profit, marking the first profitable year over the past seven years.
Let’s look at our northern neighbors - Finnair. Although through the past 10 years Finnair has quite successfully developed the long-haul flights in Asia, the last four years have been relatively difficult. In 2011, the company announced a major cost optimization program with the aim of saving around 140 million euros a year, however, the implementation was very hard against the active participation of trade unions. At the beginning of 2015, the company's chief executive criticized the Finnish government for its unwillingness to attract investors and marked the risks which Finnair would face in case it is isolated from the consolidation process in Europe. The Finnish government owns 56% of the company, and Finnair share price has climbed almost 20% this year. It should be noted that Finnair has difficulty to operate short-haul Baltic flights, as the cost structure of airBaltic and other low-cost airlines (e.g, Norwegian) is much more effective.
SAS is one of the largest European airlines, in 2014 it carried 28.5 million passengers, the turnover was 4 billion, and the net loss was 77 million. SAS was a prior shareholder of airBaltic, back in 2009 SAS sold its 47% stake to Mr. Bertolt Flick, who was at the time the head of airBaltic. Like other Scandinavian airlines SAS faces high costs of operation that are not competitive. Now the company is constantly confronted with labor strikes and it has tense relations with trade unions. Back in November 2012, the company was close to insolvency, however, an agreement was reached and the major creditors and shareholders of SAS committed to invest nearly 400 million euros in exchange for agreement with the trade unions of a significant cost reduction. SAS share price in 2015 has shown an increase of 2%.
In Russian aviation the situation in 2014 and 2015 has become very difficult. The sanctions, the value of the ruble and the resulting economic downturn caused major difficulties for almost all airlines. During this time, a state aid of approximately 400 million euros worth of loans and guarantees was received by Utair and Transaero. Despite the state aid, on September 1st Aeroflot took over 75% Transaero for a symbolic price of 1 ruble, and made a commitment to serve all future Transaero passengers. In 2014, Transaero carried 13.2 million passengers.
In 2014 Aeroflot carried 34.7 million passengers, a 10.7% increase from 2013. It enjoys a special status in Russia, for example, Aeroflot receives a fee from all foreign airlines that use Russian airspace for overflight. The precise information on what is the sum is unknown, but some estimates suggest that it accounts for approximately 500 million dollars per year. It is anticipated that the current crisis will help Aeroflot to further strengthen its position as a market leader, continuing to dominate the Russian market.
Nevertheless, there are some airBaltic competitors that are doing well. No surprises – these are the low-cost airlines.
For two years already Ryanair has been the largest European airline in terms of passenger numbers, this year 103 million passengers are planned. Ryanair showed enviable profitability last year after completing the year with 5.7 billion euro turnover and 982 million euro profit. Its share price in 2015 increased by 45%. This year was an important one for Ryanair cooperation with Riga airport, because in March the very favorable contract with the Riga airport (signed 10 years ago) expired. The company is renowned for its highly aggressive tactics in relations with airports. Since 2010, the European Commission (EC) has initiated a total of 15 different investigations, most commonly assessing whether contracts with airports are in line with market principles. Contract with the Riga airport is now switched to general market terms, and Ryanair continues to be the second largest player in Riga.
In the meantime, Wizzair is developing successfully. Unlike Ryanair, which flies all over Europe, Wizzair focuses on the Central and Eastern European geography. In 2014, it had 1 billion euro turnover and 88 million euro profits. This year has been very important in its history, because the company finally performed the long planned initial public offering (IPO) that was postponed several times in past. In February, it launched its stock quotation in the London Stock Exchange. In 2014, the company continued to improve its performance at Riga airport reaching 6% market share, and it is clear that part of the IPO proceeds would be used to compete with airBaltic.
What is happening in the aviation industry clearly indicates that the traditional network carrier model is facing great difficulties. This means airlines will need to find additional equity financing to face and overcome new challenges.
On the background of its competitors, airBaltic looks relatively well, and it has a competitive advantage due to its ability to operate efficiently. It is obvious that there are still opportunities for development in the Baltic Sea region and airBaltic is already seizing these opportunities in Vilnius and Tallinn. Meanwhile, investment attraction is currently highly competitive because of geopolitical developments that undeniably contribute to market consolidation.