Snag in Air Baltic’s Conversation With A “Strategic Investor”

An airBaltic executive has revealed that the airline’s talks with a strategic investor, which were expected to validate the carrier’s business model and facilitate the initial public offering (IPO), have stalled, leaving the airline at a crossroads in terms of its future.

At major crossroads

In a LinkedIn post, Klavs Vasks, chairman of airBaltic’s supervisory board, cautioned that the airline was at a critical juncture in its future. Vasks emphasized that while Latvian Minister of Transport Kaspars Briškens has stated that raising capital for airBaltic is solely the responsibility of Vasks and CEO Martin Gauss, the role of shareholders in enabling an IPO is “critical.”

AirBaltic is owned by the Republic of Latvia (97.97%) and Aircraft Leasing 1, a Latvian limited liability corporation (Sabiedrība, SIA). Vasks stated that shareholder support was crucial, particularly when the parties disagreed on specific topics.

The initial steps into the capital markets have brought significant challenges. Negotiations with a strategic investor, which were anticipated to validate airBaltic’s business model and facilitate the IPO process, did not go as planned.”

While Vasks did not name the potential strategic investor, prior rumors suggested Lufthansa operator as a possible suitor, with the Germany-based airline operator eyeing a 10% share in the Latvian carrier.

The airBaltic CEO noted that the company has faced a difficult political environment in addition to the talks falling through. Vasks remarked that if airBaltic intended to proceed with the IPO, local authorities would have to make bold decisions.

“However, it is no secret that any decision concerning airBaltic and made in the offices of Brīvības Street 36 [the Cabinet of Ministers of the Republic of Latvia – ed. note] often causes a storm of indignation from the media and the public – it must be admitted that it is often based on false assumptions or a lack of clear understanding of the nature and necessity of these decisions.”

Impact on Latvia

Vasks believes that raising awareness of airBaltic’s influence and importance to the Latvian economy will encourage specific stakeholders to make the right decisions and take the necessary measures.

According to a paper published by the International Air Transport Association (IATA), airlines contributed $1.9 billion to Latvia’s GDP in 2023, accounting for 4.4% of the country’s total GDP. Gauss, the airline’s CEO, distributed the material via X.

Nonetheless, airBaltic’s chairman stated that the company’s IPO could take place within the next two months. This will be determined by any agreements made with the strategic investor as well as the current state of the financial markets.

“However, it must be admitted that time is not on our side. The current bond obligations and their interest rates are not sustainable for the long-term operation of the company.”

On May 7, 2024, airBaltic priced a €340 million ($354.3 million) bond issuance with a five-year, three-month interest rate of 14.5%. The bond was utilized to refinance its previous €200 million ($208.5 million) bond.

Gauss stated at the time that the fresh bond sale and refinancing would significantly increase its cash, allowing the airline to continue investing in its fleet, which currently consists of 49 Airbus A220-300 aircraft, according to the most recent data from ch-aviation.

Vasks warned that if airBaltic wanted to satisfy its obligations and achieve its strategic goals, it couldn’t keep functioning with the negative equity it had built up. While the CEO admitted that an extra financial injection could spark another local media storm, the necessity for investment was critical unless Latvia decided to forsake its stake in airBaltic.

Pleading for patience and understanding

Vasks continued, “No company has gone public without clear ambitions, a well-defined strategy, and capable management.” He stated that, while airBaltic has these pillars in place, it requires a common vision among all stakeholders to assure its success.

“As a key driver of economic growth, export potential and regional connectivity, airBaltic’s contribution to the lifeblood of the Latvian economy is irreplaceable.”

The executive went on to say that disregarding these advantages for political gain puts one of Latvia’s most powerful brands in jeopardy. Vasks said that even though the Latvian government had to spend a lot of money to save the airline after the global financial crisis, the action “was objective and necessary.”

“Therefore, I call on all those involved: both those directly responsible and everyone who cares about Latvia’s development in the coming years, to show patience, understanding and a more optimistic view of the future.”

airBaltic reported a net profit of €40.2 million for the third quarter of 2024 and a net loss of €48.5 million for the nine months.

Furthermore, while the airline has had to deal with extended turnaround times (TAT) during the maintenance of the Pratt & Whitney PW1500G engine, the A220 aircraft family’s sole powerplant, the problems will be exacerbated during the upcoming IATA summer season, forcing the Latvian carrier to cancel over 4,600 flights between March and October.

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