airBaltic CEO Martin Gauss: probably private after 2023 IPO

PH: I'm talking now on CAPALive to Martin Gauss, who CEO of Air Baltic. airBaltic's a little airline that really shouldn't exist from such a tiny country as Latvia, but is in a lot of ways turning the world on its head by being the first A220 aircraft operator, which brings with it a lot of very interesting features. And that's one of the things that undoubtedly Martin will want to talk to me about, which I'd certainly also like to talk about. Martin Gauss, welcome to CAPALive. Good to see you again.

MG: "Good to see you again."

PH: Martin, let's kick off with where we're at at the moment. Obviously this is the key thing everybody's been looking back on what passed for a summer with different feelings, some more successful than others, but also looking forward to the near term as well. How have you fared? You've kept your capacity up fairly well. Most of your fleet is still in the air. Just take us through the last two or three months, if you would.

We became the largest operator in the world of the Airbus A220-300 and we are now the largest in Europe on the A220. So that little airline from little Latvia has done a lot of change

MG: "We had a very difficult start because Latvia was restricting travel until June, so there was a recommendation not to travel and that basically took our inbound summer traffic away. So inbound to the Baltics, we were limited. We were flying, but we couldn't bring people in. What happened, as of June, when people were allowed to travel again, we saw a surge and it got better and better by months. Now, looking now to just past, we haven't published the figures, but for us, a new record in these times was a positive EBITDA, positive EBIT, so that surprised even us. We are still, of course, down on the capacity compared to before the crisis. We're not like the leaders in our industry who can fly a 100% of the capacity, but we are now flying, as you said, with an all Airbus A220 fleet.

"We became the largest operator in the world of the Airbus A220-300 and we are now the largest in Europe on the A220. So that little airline from little Latvia has done a lot of change. And what we see now, and also this week, looking forward, an unusual behaviour of passenger bookings. We have 84% of our passengers booking only the next eight weeks in advance. And that is the trend we have seen now for several months, so nothing beyond eight weeks in advance, but it hasn't stopped. Normally at this time of the year, we would see it drop already for five weeks in bookings, but that hasn't happened yet. So we're waiting basically every day, when are the things going forward dropping, but they're just maintained. So that is something new. That, of course, makes us very happy right now, but still we are on a significantly lower levels than we were 2019."

PH: But at the same time, when we were talking before you came on air, you've also started up a number of new routes. Tell us a bit about load factors and yields. How have they been? What are they looking like?

We saw a higher percentage of people booking business class, that doesn't mean that people were going for a business trip, but people enjoy that freedom of having the mid seat free

MG: "On the routes, as we operate in Riga, Tallinn and in Vilnius, a point to point system connecting to the hub, we are not having the same share of transfer traffic because of restrictions flying further east to there we have not yet the network in full. But as we had to reduce frequencies to the main airports we were serving, the ones where we connect to long-haul flights, as that is still limited, we opened different destinations. And also something we found out is that we have more routes in airBaltic on offer now, right now, than we had in 2019, while capacity is significant below.

"On the yields, there are days for sure yield pressure resolved at capacity. But again, we enjoy it because we have a full service business class and an ultra low cost economy. We combined these two and have not changed it. We saw a higher percentage of people booking business class, that doesn't mean that people were going for a business trip, but people enjoy that freedom of having the mid seat free. And I think that was an effect, or is an effect, of the people want to have some space because on the full flight, of course, the middle seat isn't free. And that we saw in the mix of the yield and has led to a yield which is slightly higher than it was 2019 at the same time."

PH: That's an interesting spin-off benefit, isn't it? And I know before things, as they say in New Zealand, went to custard, you were actually transferring about half of your traffic, about 50% of your traffic was transfer traffic. Do you see that coming back as conditions start to stabilise a bit? What are the conditions that will influence that return?

We are now at 33% transfer compared to the 50 before. But the plan is, of course, to bring that back because Riga is our hub working today

MG: "It will depend on the eastern destinations where we were very strong connecting to the East, and it will depend on the business traffic also to return because a lot of the connectivity airBaltic provided through Riga hub was unique destinations combining and having the perfect travel schedule because of our geographic location. We are now at 33% transfer compared to the 50 before. But the plan is, of course, to bring that back because Riga is our hub working today, but we are not having the frequency as we had before, not flying five times a day to Amsterdam then connecting. So therefore, while we are not flying high frequency, we will not have the same transfer share, but I'm very sure, and we can see these signs that once we get out of the crisis, we will see that coming back."

PH: Right. And just jumping forward a bit, you're establishing a code share with Delta. Tell us about that. What's the rationale, apart from the fact perhaps that they also operate A220s, although I don't suppose they'll be connecting with you, what's behind all that? What's the strategy with Delta?

And we have a good programme from all three Baltic states into Amsterdam and Paris. And then obviously from there, onwards Delta is also connecting to the US

MG: "Yeah. It's a code sharing plan. It's not yet approved. We have had a long relation with different code share partners over all these years. Today we have 24 code share partners through all alliances, some stronger, some weaker, but they are all strategic code share partners. airBaltic is, apart from Lufthansa, serving Frankfurt amongst our code share partners, always the carrier who flies on the Riga sectors. So that is why we have so many code share partners because all the other carriers use them, our use their code on our flight.

"One of our strong partners developing was KLM-Air France group. And we have a good programme from all three Baltic states into Amsterdam and Paris. And then obviously from there, onwards Delta is also connecting to the US. That is something driving this one. It's a North Atlantic connection because Riga still does not have any direct long-haul flights, while it should have, because there's sufficient traffic, there's enough traffic, but none of the US carriers yet have said, "We land in Riga." Let's hope that that comes because we are feeding pretty well this airport. And we could fill it. I guess everybody is playing, but maybe a low-cost carrier will start such a group."

PH: There seems to be a gravity shift, Martin, towards much more alliance and partnership thinking as we emerge from COVID. Would you go the whole way with one of the global alliances or do you prefer to remain with a foot in each of them as it were?

As a little airline, the code share partners have a big impact on our sales in their home markets, because we do not have to do the same advertising because they carry us in their home markets, are selling on their name

MG: "All these years this question came up, why we are not going to one of the alliances? And so far with 24 code share partners, out of each alliance, very different setup. We are doing very well. If we look at the map of what airBaltic is serving, then we are connecting to very different hubs of our code share partners. And from there, when the reach of our aircraft is coming to an end, which is seven hours, then the partner on the other end takes passengers onwards. Or if it's a short destination, then we have the partner where they are serving their home markets better than we do.

"And as a little airline, the code share partners have a big impact on our sales in their home markets, because we do not have to do the same advertising because they carry us in their home markets, are selling on their name. And these partnerships for us work better as if we would be now in one alliance and then have to follow the rules because there would then be maybe some issues with some of the partners. So all these years for airBaltic, it was very beneficial to have many different partners. It's always a win-win, otherwise the other carriers wouldn't close the partnerships with us. But they make a significant contribution to our revenues every year and growing, especially now in the time when we restart."

PH: Yeah, I guess the danger is, as you get bigger, you become more of a challenge and therefore things start to change. With the A220 you've got that additional range. And because it's such a relatively small aircraft, lots and lots of potential end points for it. Are you looking further eastward as well in terms of routes?

People say I'm Mr. A220 sometimes because I talk so much about it, but it is only proof of how much I like our workhorse, which finally we only focus on because we could retire the other two fleets

MG: "So roughly we can have seven hours unrestricted. So that's the maximum the aircraft can do. We are using it on two routes now, one is a more touristic route, it's Tenerife. And the other one, which we opened now at the end of September, is Dubai four times a week from Riga. And we could go to daily from here, but that is not a market at the moment, but more or less, we are serving the very long destinations from here. But the aircraft is not only good for long, it's good for very short routes because it can do the turnarounds in 30 minutes. And we can, the aircraft is capable, from a few exceptions, to land at airfield in Europe. So yes, there's many opportunities with that aircraft. Right now, having 149 seats was a very economic aircraft. And the aircraft is very liked, with the leasing community, we had record attendance of the sale and leaseback tenders we issued for the last aircraft. So yes, we're very, very happy. Since 2012, being recognised as an Airbus A220 operator, now being the largest one, it has paid off to invest.

"We are the only airline doing heavy maintenance on the Airbus A220. We are training for major carriers, their technical personnel. We have now, this December, five years of operation of that brand new aircraft. It's a lot of fun to have the A220 with the range and also with the comfort. People say I'm Mr. A220 sometimes because I talk so much about it, but it is only proof of how much I like our workhorse, which finally we only focus on because we could retire the other two fleets."

PH: Right. Obviously not many operators are flying the A220 yet, but are you likely to be one of the few who actually has a business class because you cater to the business traveller?

There is a demand for business class travel, and it will be a demand in the future, not because of the seating only, but also of the flexibility with the tickets, of package allowance and all these other things

MG: "Yeah, we made it clear that we will be a hybrid carrier and we always were with a business class where the middle seat is free. So not the classic which you have in the US with two and two seats. We have the three and the two seats as it is the standard config on the aircraft. We just have throughout the aircraft, the same seat pitch, and there's a curtain. And middle seat is free if you book business class. With that we have the flexibility to go in full economy if there's no business class demand. And if there's one business class passenger, we have a business class.

"That is our concept. It has been proven to work, especially when you have code share partners who also have a business class much easier than to sell a ticket, because you said, it is business class all the way through. And there is a demand for business class travel, and it will be a demand in the future, not because of the seating only, but also of the flexibility with the tickets, of package allowance and all these other things. I think we all in the industry know that the business class is something people want as a flight it's more, that is the demand."

PH: You have a pretty generous economy seat pitch, don't you relatively?

Load factors are, at the moment, at around 68%. We are not having full aircraft all the time, which means the experience for the passengers is even better while we are not full. Some routes, we have full aircraft and still this aircraft is very pleasant to travel on

MG: "Yes. And with the seats we have now, all of that is new. We get good feedback about it. I think we have a very good product. We had a good product before. We made it even better by having only one aircraft type now. So the passenger experience on airBaltic is very good and we get very good feedback.

"The load factors are, at the moment, at around 68%. We are not having full aircraft all the time, which means the experience for the passengers is even better while we are not full. Some routes, we have full aircraft and still this aircraft is very pleasant to travel on, whoever has done it. And more and more airlines are getting it now. We have Air Canada having the aircraft. Delta has them. Breeze, the new airline set up in the US, will be focusing only on A220s in the future. There is more and more carriers selecting the A220. And I think we will see more joining in as our industry improves. The aircraft is environmentally friendly because it has a 22% reduction in fuel flow and CO2 compared to the same seat that we were using."

PH: All right, that's enough marketing for Airbus. They're going to have to pay us if we have any more of that! No seriously, Martin, one of the things that you've never been short of is innovation, creativity. Obviously at a time like this, when yields are struggling to get back up ancillaries are very, very important, you've got a sky shop now, are you expanding that to generate revenues from the retail?

What we introduced was an in-house development of an onboard wifi system, which I think is the simplest one you can have where you connect to the wifi on board. You don't need to load an app. We're very happy with that innovation because for sure in the future it will increase ancillary revenues on board

MG: "Yeah. We have been traditionally as a low cost carrier working with ancillaries. And what we introduced was an in-house development of an onboard wifi system, which I think is the simplest one you can have where you connect to the wifi on board. You don't need to load an app. All you need to do is scroll through the food menu, beverages menu or the shopping, and all you do at any time, you put your seat number in and you enter and that's it. And then the cabin crew on their iPads see your order. They come to you and they serve you. And then you pay. You don't give any of your details or all these things. Very efficient, works very well. We started it, rolling it out and we're very happy with that innovation because for sure in the future it will increase ancillary revenues on board. It was in house developed. That makes me very proud because we always come up with little solutions as a small airline, which really work well.

"And I'm also very happy in this time we were able to develop that. At the moment, it's live so we see the first results and they are very promising. On the other side, of course, we are looking at the ground products, what can be done there? It will be a little bit different now as we start, because as aeroplanes are not so full anymore, or these hand baggage issues, I think all airlines are taking it a bit easier. They're not as strict as they were. So you have to offset that ancillary, which we made there with other ones."

PH: Well, what about retail more generally though? Do you see that as an opportunity?

There's a lot of passengers who would like to have a seat in between free today and are willing to pay more for that

MG: "Of course it's an opportunity, but I think we all have to see which passenger segment come back. What are the needs passengers have? As I said earlier, there's a lot of passengers who would like to have a seat in between free today and are willing to pay more for that. Also, we will not see the traffic, the heavy frequency flying on certain city paths. We will see more different destinations. And that might then give the opportunity for more higher yields on some of the routes, because you are maybe connecting now to a place which wasn't connected before. We see that already with our two carriers, Ryanair and Wizz Air in Europe, they are doing a very good job there, flying from places which you would not have had on the map. And they are doing successful opening of routes there on a weekly base. We see the same, that that works. And that gives them also the opportunity for additional revenues, different revenues than what we had before the crisis started."

PH: Yeah. And it is becoming something of a fixation for many airlines, I think, just really to try and derive new ways of generating ancillary revenue. Talk to me about cryptocurrencies, Martin.

We issued as the first airline NFTs. And if you look at it, then it is a marketing tool for us, not the value of the NFT, but the NFTs we issue are sold out the moment we issue them, which is very nice

MG: "First airline in the world, 2014, was accepting Bitcoin when nobody knew what that was. We, since that time accepted cryptocurrencies. Now that that is the issue, if we would have kept all the cryptos from 2014, maybe we would not have needed our shareholder to help us. No, airBaltic never held any crypto because we always, when we have a booking in cryptocurrency, it is transferred with a partner in exchange, same day into euros and we're not holding them. We're just offering it as a form of payment. Of course, now people understand what cryptocurrencies are, we still have it. And some passengers use cryptocurrencies to pay their tickets, which I think is normal.

"We, on top of it, came out with NFTs. It's also something new, also in the crypto world, we issued as the first airline NFTs. And if you look at it, then it is a marketing tool for us, not the value of the NFT, but the NFTs we issue are sold out the moment we issue them, which is very nice. But the effect, if you have one, then you have access to an airBaltic block, which gives you one of the Latvian cities in very, very detailed with nice pictures and so on. It's advertising for Latvian cities so that tourists come. And on the side effect, if you are one who holds such an NFT, you're holding an NFT and in 10 years time, people will say, "I bought an NFT from 2021 when there was a hype." But it is something not generating revenue. The NFTs, that is a marketing tool for us, which works for the audience who likes that.

PH: Right. Martin, you mentioned that you're a government shareholder, you're a majority shareholder. Have you had to rely on the government much to get you through this crisis over the last 18 months?

The company probably will end up being a private company after the IPO. That is a process we are preparing now because we have to, within the next years to do it. And as the industry comes back to normal, airBaltic will be very well positioned to go

MG: "Yes. We had to rely on them. We issued a bond in 2019, where we had a lot of cash when we went into the crisis, but we saw, when the crisis started, we will need additional equity to get through the crisis. And then we got 250 million from our majority shareholder, the state, as a bridge for the COVID time. It has to be returned through an IPO. That was the EU decision. We will be getting another bridge now, because time has moved on, with 90 million, it was decided to finally get out, assuming that after the fourth wave coming in now that we are then climbing back out. That is the industry forecast at the moment. Both of it has to be returned, the second tranche has to be approved by the EU still.

"But in our forecast that we have for the Airbuses and what we see right now, we will then go to the stock exchange and we will return it. Looks like we will manage that because this COVID time will be over one day. And yeah, we were relying on both shareholders because also the minority shareholder had to accept that that happens to the majority shareholder. The money is not a gift, unfortunately, we will have to return it through the set of shares. And then the company probably will end up being a private company after the IPO. That is a process we are preparing now because we have to, within the next years to do it. And as the industry comes back to normal, I think airBaltic will be very well positioned to go."

PH: So an IPO is potentially a prospect in 2022, but maybe '23, hopefully the government will do very well out of it. There are precedents.

The state will benefit from it in two ways. First of all, a larger airline and still being the shareholder and returning the money they have given. But the biggest impact airBaltic has for Latvia is the GDP impact because 1.8 million people in the country, and more than 5 million passengers from the past, when that returns in the future, only then an IPO would make sense

• MG: "Yeah. The earliest now we see is '23 because we plan our '22 as a year where we will maybe be below 2019 and only exceed 2019 levels in '23, though that we had to adjust, maybe '24. We have, from the beginning of the aid, we have five to seven years, according to the yield to do that.

"The state, yes, of course, will benefit from it in two ways. First of all, a larger airline and still being the shareholder and returning the money they have given. But the biggest impact airBaltic has for Latvia is the GDP impact because 1.8 million people in the country, and in good times, more than 5 million passengers from the past, when that returns in the future, only then an IPO would make sense. It is, I think, very positive for our majority shareholder. And that's how everybody sees it. And the support from the Latvian State has been there at all times and is there today because they know about the impact of this airline to the Latvian Baltic economy."

PH: You mentioned a sale and lease back, are your lessors was being relatively friendly through this period?

So the leasing community likes the A220 very much at the moment. Helps us, of course, it has a big impact for us long term as our lease contracts typically run 12 years. And if we set good conditions today, they will be a good base for the future

MG: "Very friendly because the A220 is liked so much that we have had record attendance of the sale and lease backs. We normally do four aircraft in one tender. And the last ones we did, these are all the aircraft which we take in this year was, let's say, heavily oversubscribed. And it is a very, very high interest to do a sale and leaseback on our A220s. Maybe, also because we have a good track record already. So the leasing community likes that aircraft very much at the moment. Helps us, of course, it has a big impact for us long term as our lease contracts typically run 12 years. And if we set good conditions today, they will be a good base for the future. So we are also very happy on that side. And yeah, I would say a very good relation in these difficult times with the leasing community we have."

PH: That's good. And you've got another 20, I think, coming over the next four or five years, Martin?

So let's say we get out of the crisis and the success story can continue, then we could exercise options. But the firm order, we will already get to delivery of the last aircraft in 2024, and not to forget airBaltic was operating already 40 aircraft in the year 2019

MG: "Yeah, not over the next four or five years, we have 32 by the end of this year, then we have 18 coming, eight of them next year, so 40 by the end of '22, and in '24, we will receive the 50th aircraft. We have an option for another 30. So let's say we get out of the crisis and the success story can continue, then we could exercise options. But the firm order, we will already get to delivery of the last aircraft in 2024, and not to forget airBaltic was operating already 40 aircraft in the year 2019, different mix. So we are in the year 2022, only back at where we were 2019 already. We are taking them, two more coming in the next two weeks, then that's it for this year. And then we start with another eight next year."

PH: Well, that's a nice positive note to end on. I wish you all the best in the coming months, Martin. I'm sure you'll find a way through, as you always do. Good luck to you and great to see you again on CAPALive. Hope to catch up with you personally sometime soon.