The role of airports is greatly underestimated, as the airline industry goes forward after a pandemic that caused devasting effects.…
Poised for Success in Eastern Europe: How Martin Gauss Is Leading airBaltic Through Trying Times
The face I saw entering the plane was familiar. He put his belongings on his seat and went to the cockpit to greet the pilots. That’s when I asked if he was who I thought I was — and the answer was yes. It was. Quite a coincidence, as I was myself preparing to interview him four hours after that.
CEO of Riga, Latvia-based airBaltic, Martin Gauss was returning to the headquarters after a weekend off. He sat down across the aisle from me. It was the perfect opportunity, so before the actual interview, we spent the flight talking. It was a great opportunity to meet a fascinating character who has led the only airline based in the Baltic states through the largest crisis of the industry’s history.
At that point in time, flying was already allowed and, with the EU Green Pass, we could even be in the offices maskless – given the local regulation at the time, provide everybody in the named “green zone” was vaccinated. It was not so just a few months before.
“We had that moment when we all sat here in this room,” recalls Gauss, “and the Prime Minister announced that they would do a lockdown that meant for us we wouldn’t fly at all, so we stopped completely. In the beginning, it was the same for everybody, you did not know what would come. We focused first on staying, cause nobody knew how long it would go, then we modified our business model, now we are growing.”
The very centered, straightforward German executive led an airline that did not fly for 62 days. A restructuring followed — the airline retired its last Boeing 737 Classics and Bombardier Dash 8 Q400s, transitioning into an Airbus A220-only fleet, cut jobs and after that, was burning “only” 3 million euros ($3.47 million) every week; it also received a 250 million euro injection from its largest shareholder, the Latvian government.
Now, what is the best way forward? Gauss believes the airline did its homework.
“The thing is, this airline now is just waiting to grow,” he said. “That’s it. What we need — the restrictions which still exist [to] ease, but they are easing now. We see [at] all airports the flow of passengers normalize. The people want to travel. They wanna meet each other. People didn’t meet each other for a very long time just because flying [was] so complicated, [but] we saw it now in July, August. We had promising numbers, all airlines in Europe.”
Gauss sat down for an hour with AirlineGeeks in his Riga headquarters, in an office from which he can oversee his airline’s operations at Riga Airport.
Going Forward: State Aid
While he sees uncertainty going into the winter season — “business travel is not yet picking up” — he’s looking forward to the seasons following that. The executive says that airBaltic’s smaller size — the airline currently operates 32 Airbus A220-300, the last of which arrived in Latvia a week ago — is both a curse and a blessing altogether.
“It’s easier and more difficult [to manage a smaller airline],” he said. “It’s easier because you can act faster in a small organization. That does not only apply to an airline — also to other companies — but large organizations normally can finance themselves differently because they have [a] different shareholder structure or the capital markets know them very well. Therefore the large airlines in this crisis are seen in the spotlight… I think we managed [the crisis] well, we are adjusting fast, and we also have a strong shareholder structure, whose shareholders are supporting us to get out of the crisis.”
The shareholder Gauss refers to is the Latvian state, which owns 96% of airBaltic.
“In this crisis where you need a lot of cash, the state is a very good shareholder. If you want to raise capital at the capital markets and you wanna grow in a good time, then maybe it’s better you are not owned by the state,” he said, adding that he is “very happy that the state did what they did and supported us with equity which we have to return, so it’s not a present.”
The executive says the money, a 250 million euro sum, will be returned through the airline going public. He reckons this should happen once the company’s finances are stabilized, likely by 2023 or early 2024. He says without this cash, airBaltic “wouldn’t exist anymore,” though he says the airline already reached a positive EBITDA — short for earnings before interest, taxes, depreciation and amortization, and a popular metric to capture operational profitability — during summer.
“If things go super, super good next year maybe we can achieve [a net profit] earlier, but at the moment we plan to be profitable again in 2023,” Gauss said.
The Secret Behind a Successful Small Airline
But airBaltic is an exception within Europe. The continent, before Covid-19 and now, was dominated by big groups of airlines, either low-cost carriers or legacy/network carriers, all private. State-owned carriers exist but were usually mismanaged, losing plenty of money in the process. airBaltic was profitable, and it is in the middle of the way in the low-cost, point-to-point/network carrier spectrum. Gauss often labels his airline a “hybrid” one.
While it has its hub in Riga, the airline also offers service in major routes to the capitals of the two other Baltic states, Tallinn, Estonia and Vilnius, Lithuania.
“We’re a hybrid airline as it’s business class with [an] ultra-low-cost economy cabin. We are connectivity providers for the Baltics and we fly with Riga as a hub, not only point-to-point which we do also from Tallinn and Vilnius,” Gauss said. “In Europe, we are the only airline that’s doing this, in the U.S. you have airlines that do this more than we do, but in Europe, we are that airline.”
But an airline can only rely so much on such a small market. All in all, from the demand side, the three Baltic states have just over 6 million inhabitants, and that’s with a growing competition of the ultra low-costs from the capacity side. In this regard, the hub in Riga comes as crucial, with a large percentage of its passengers only connecting through the airport.
That’s where the airline’s partnerships are useful. airBaltic currently has partnerships with dozens of carriers, such as Air France, Lufthansa and SAS. While this helps feed the Riga hub — and, residually, the other two bases — it also serves as a sort of shield against undesired competition from these very carriers.
Fighting the Big Guys
Now one carrier that is extensively growing in Latvia is Ryanair, the largest ultra-low-cost carrier in Europe. Gauss thinks that what shields airBaltic from the carrier’s attacks is that both cater to fundamentally different markets – despite airBaltic’s Economy product being self-labeled an “ultra-low-cost” one.
“[Ryanair] keep[s] opening routes, but also closes routes, [Riga to] Pisa was a good example,” he said. “We announced [it], then Ryanair came, they announced, then they didn’t fly it. Because the market maybe for them wasn’t seen as big enough; we had Wizz as well starting flying Riga to Lübeck, which they call Hamburg, […] and they started from 9.99 euros, and they kept the price until the very end. We continued flying to Hamburg, [with] our concept which also includes the transfer traffic and they withdrew of the route, we have routes, [as] Ryanair’s original home base, and we saw an opportunity because we have a different traffic segment and we opened Dublin, and it became a profitable route for us at the time, so we are competing with the number one low-cost carrier, numbers one and two, successfully.”
And as the saying goes, if you can’t win them, join them. Gauss doesn’t rule out signing partnerships with the ultra-low-cost carriers in his home market, although he says that would be a move that would need to come from his competitors.
“They would have to open themselves to say ‘OK, we have to continue growing,’ for example in a market [in] which they don’t want to penetrate so much that they [would] say ‘OK, we [will] have a kind of a relation – could be. But right now, coming out of the pandemic, looking at the numbers, the winners at the moment are clearly Ryanair and Wizz Air, they are nearly back to their capacity which they had in 2019, the rest is 40-50% their capacity.”
In this process, the aircraft plays a big part. airBaltic is currently the largest operator in Europe of the Airbus A220, and trusted it in a time when few did. Apparently, this is paying dividends now. Not for nothing, Martin is a massive enthusiast of the plane, whenever he can, talking about the wonders his aircraft can do.
The company first ordered its first A220s — back then the CS300 — in 2012, back when the airline operated a fleet of Boeing 737 Classics and Bombardier Q400 turboprops, and currently now is expected to reach 50 units of the jet by 2024.
“We had a time when we also looked at [Sukhoi] Superjets, none of these aircraft would have been able to fulfill what we wanted to do, and still today do so the E2, for example, did not have the range, and therefore it was not an aircraft we wanted to use because already at that time we were connecting Abu Dhabi, before to Dubai then Abu Dhabi and now Dubai again, so we needed an aircraft with a [sizeable] range,” he said.
airBaltic currently operates Riga-Dubai nonstop with the A220, a flight of almost six hours.
Another component that helps Gauss’s airline to dodge the attacks of Ryanair and Wizz is the size of the A220. While Ryanair’s and Wizz’s smallest aircraft have 189 and 186 seats, respectively, the A220 carries 145 passengers, which, alongside the airline’s hub connectivity strategy and its relative focus on the corporate consumer, helps drive traffic and makes routes possible which, with Ryanair, would need to carry way more passengers to be viable.
“If you want to fly head to head with Ryanair, you should have such an aircraft like that [the 737],” Gauss said. “But we’re not going head to head to them on that same traffic; we have a business class, which is a completely different product, not only product and price, but from what it does in distribution by travel agencies – so big corporations, for example, when they book the tickets they traditionally book by travel agencies.”
Much of airBaltic’s flexibility, he says, comes from the airline’s fleet.
“So we have with the A220 an aircraft [with which] we can open routes which we maybe wouldn’t open with a 189 [seater] either. So we cannot compete on the cost per seat as a 737, 321, we can’t compete with their operating cost. [But] we can serve the same market with a higher frequency, for example, because you do not have to fill each time. Most of the time, we fly high frequency. The ultra-low-cost flies twice a week. We fly every day.”
That sentiment extends beyond the airline’s schedule to its network, which Gauss said is better suited to most travelers than are those of airBaltic’s direct low-cost competitors.
“We depart at 7:30 in the morning, at the prime time,” he said. “[Or] we depart here going somewhere at the middle of the night, and if you have business to do or a transfer, with Ryanair you could fly to Dublin, you get to Dublin, full stop. With us, you can fly Dublin-Riga, Riga-Moscow, Kazan, Riga-Minsk, Riga-whatever. All the routes before the crisis, all the network, were open from Dublin, via Riga, so we did get also passengers wanting to go somewhere where the connectivity we provided was the best, [such] as Moscow.”
Gauss is not concerned by the fact that airBaltic operates with a higher cost per seat than competitors like Ryanair, which he says is a result of the airline’s choice to invest in smaller aircraft. He believes his airline will come out ahead when looking at total costs across the schedule.
“So that’s one difference, and then [there’s] the frequency, that on Dublin — which is a bad example because that is a top route of Ryanair — but on other routes, they might fly once a week and we might have flown five times a week,” he pointed out. “And therefore, the cost per seat [becomes] irrelevant. On the day you go head to head, you are right, the cost per seat is unbeatable because you get more seats but if we fly both the aircraft empty, who has higher cost? They have because the aircraft is heavier, bigger, and therefore they have higher cost.”
Outgrowing the Baltics
But while airBaltic sees a post-pandemic world, it sees the need to adjust its sails going forward – to avoid adding too much capacity it won’t be able to fill. In this regard, Gauss says the airline plans to add another nearby base in a fourth country in the near future.
“We always thought of [putting] about 50 aircraft in the Baltics. Now i think we will shift and say ‘OK, 40 for the Baltics, ten aircraft outside’, and as we grow now we will be placing aircraft outside the Baltics.”
The German executive says that the airline plans to roll out this expansion before 2023, although he does not disclose the country he is looking at.
“We would first go where we are known, widen in the circle around the Baltics, without saying which airports. We’re now looking at what makes sense for us, flying from where to where. It [must] also be something we can do. We do fly charters, a small percentage, and we will see now, as we get more and more aircraft, [too] much capacity to place in the Baltics, and then looking at, we can also fly somewhere else, maybe place the aircraft outside the Baltics and then fly into the Baltics. ”
Gauss has ESG in mind. Casually, airBaltic’s main color is green, but according to him, he does not want the airline’s “green-ness,” so to speak, to stay confined to the color, and plans to unveil ambitious sustainability plans for his airline very soon, as he recognizes just doing his part in having aircraft that burn less fuel is not enough.
“We will be in the near future talking about what airBaltic wants to do differently,” he said. “It’s too early because we still are battling around the crisis, but we have plans, had them before the crisis, and we’ll then talk about it. […] We want to take part in changing this with a lot of initiatives: you see plastic bottles [in his office] that used to be glass, we are well ahead, had glass only here because of higiene, bring back a lot of plastic wrapping the food and all these things. Covid is there to stay, Covid will not be gone, but we will live with it, we will get vaccinated, people will have a [higher] hygiene standard, focus again on reducing unnecessary things like plastic waste, LED lights, our next car fleet, the company cars will be electric cars, so we will do all these things, the key is of course the fuel burn.”
He says carbon offsetting will be available in the near future for passengers to opt-in, as is already standard in several airlines – although he wants a program that focus on the Baltics.
“But it’s not the way out,” he says. “We need to find ways of using sun, wind, water, we need to use the energy which is already there on the planet, and not use fossil to create energy and I think once we have sufficient technology in place that we can replace today’s fossil energy use we will do, so every year we see more and more energy: one day will [it] not be the issue.”
“If we would have 100% today undisrupted solar energy you could use endless energy all coming from the sun. Nobody would really think about energy as it [is]. Today when people use the phone, they do not think about the cost of doing a call because we’re using the internet for the call WhatsApp for the call, you can call somebody and talk for five hours. It might be the same for energy one day. That the energy is there and it’s free it’s endless because you’re not using fossil energy.”
Gauss is not ashamed of the reduction of flying for environmental concerns either.
“People will be flying because we will be having more and more efficient aircraft to transport us, so I look to a long term future [where] we have some full-electric planes, United ordered some, Azul, I think, too. [To] our size of aircraft will take a little bit longer to fly electric; we can do fossil fuels, e-kerosene is coming over, and we gradually go there.”
Looking at the future of the broader transportation industry, Gauss believes people’s continued desire to travel will lead to a resurgence in demand that will have to be paired with increased sustainability.
“Why would you think that the human race which has developed so nicely will now stop exploring the planet?” he asked. “No, but they want to do it and feel good about it with no damage to the planet, and that is the change. People will be commuting more than before when the crisis is over but will do it with more responsibility.”
The Road Ahead
But more than anything, the executive is optimistic with respect to the future of his airline. “In 5 years, we will definitely have our 50th, at minimum our 50th aircraft flying, we’ll have aircraft outside the Baltics, and we’ll have passenger numbers which are well over 2019 levels.”
When asked about this winter season, he reckoned, “It’s going to be cold as always in Latvia, also frosty from the passenger numbers; but we are prepared,” and he expects airlines that got this far to survive this next tough season. “Some airlines should have failed in the last three years according to the public. They haven’t. It’s never nice when somebody fails, therefore, I will be very happy when many, many people come back into the air.”
Topping off his five-year prediction, when asked if airBaltic could do it as profitably as before, he confidently said: “We did it profitably before the crisis. Why would we not do this afterward?”
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