airBaltic-Etihad codeshare could lead to deeper links. Meanwhile, EU state aid inquiry continues

AirBaltic's network is almost all European

AirBaltic's capacity, all international, is almost entirely focused on Europe, with 61% of its seats in Western Europe and 38% in Eastern/Central Europe. It has two destinations in the Middle East (Abu Dhabi, in the new codeshare with Etihad, and Tel Aviv), representing only 1% of its seat capacity (week of 16-Dec-2013, source: OAG). The Etihad relationship will significantly extend airBaltic's offer to its passengers in Asia-Pacific.

Etihad's code is now on the new airBaltic operated service from Abu Dhabi to Riga and beyond to 15 cities: Alesund, Barcelona, Bergen, Billund, Copenhagen, Helsinki, Lappeenranta, Oslo, Prague, Stavanger, Stockholm, Tallinn, Turku, Vienna and Vilnius.

Subject to regulatory approval, airBaltic plans to place its code on Etihad flights beyond Abu Dhabi to Cairo, Jakarta, Singapore, Bangkok, Amman and Muscat.

airBaltic international seat capacity by region: 16-Dec-2013 to 22-Dec-2013

Source: CAPA - Centre for Aviation and OAG

Russia is airBaltic's largest country destination by number of seats, closely followed by Germany. The other Baltic states and the Nordic countries are also important destinations for it. Apart from Germany, its next most important Western European destination countries are Italy and France.

airBaltic international seat capacity by country: 16-Dec-2013 to 22-Dec-2013

Source: CAPA - Centre for Aviation and OAG

A short-haul and relatively low frequency network profile

AirBaltic's short-haul focus is reflected in the concentration of its weekly frequencies around routes of a roughly two hour flight duration. Of its 42 destinations, it serves almost half (22) with less than a daily frequency and only nine with a frequency of twice daily or more. Local capital cities Helsinki, Vilnius and Tallinn are airBaltic's most highly served destinations, each with a four times daily schedule.

Its leaning towards low frequencies suggests a more leisure-oriented offer, since business travellers tend to prefer a wider range of schedule options, although it supplements its own offer with its 18 codeshare partners. The combination of short-haul and a network nuanced towards leisure routes takes airBaltic into European LCC territory.

airBaltic frequencies and flight time: 16-Dec-2013 to 22-Dec-2013

Source: CAPA - Centre for Aviation and OAG

airBaltic destinations by frequency per week: 16-Dec-2013 to 22-Dec-2013

Source: CAPA - Centre for Aviation and OAG

Leading market share in Latvia

AirBaltic has a strong share of seats at its Riga hub, with 61%. Nevertheless, it faces growing competition from foreign competitors, in particular LCCs. Ryanair is number two at Riga, with 18% of seats, and Wizz Air number three with 4%. Lufthansa and Aeroflot, fourth and fifth respectively, are both codeshare partners of airBaltic, as is ninth-placed Transaero.

Riga International Airport seat capacity by carrier: 16-Dec-2013 to 22-Dec-2013

Source: CAPA - Centre for Aviation and OAG

Top 10 airlines in Latvia ranked by share of total seats: 16-Dec-2013 to 22-Dec-2013

Rank	Airline	Share of seats
1	airBaltic	61%
2	Ryanair*	18%
3	Wizz Air*	4%
4	Lufthansa*	4%
5	Aeroflot*	3%
6	Norwegian Air Shuttle*	3%
7	Finnair*	2%
8	Turkish Airlines*	2%
9	Transaero Airlines*	1%
10	LOT Polish Airlines*	1%
	Others	2%
	Total	100%

* indicates a foreign carrier
Source: CAPA - Centre for Aviation and OAG

Top 10 routes reflect airBaltic's Baltic/Nordic focus

AirBaltic's top 10 routes reflect its focus on the Baltic and Nordic region, with all six local capital cities represented in the list. The importance of Copenhagen, Oslo and Stockholm reflects airBaltic's still close links with SAS, which owned 47% of airBaltic until Jan-2009.

In Eastern Europe, Kiev and Moscow are represented and, in Western Europe, Paris and Amsterdam. Air France and KLM are both codeshare partners of airBaltic and the presence of the latter two cities in its list of top 10 routes partly reflects its need to offer Latvian passengers long-haul connections via these partners.

airBaltic top 10 routes by seat capacity: 16-Dec-2013 to 22-Dec-2013

RIX = Riga, TLL = Tallinn, VNO = Vilnius, HEL = Helsinki, ARN = Stockholm Arlanda, CPH = Copenhagen, SVO = Moscow Sheremetyevo, KBP = Kiev Boryspil, OSL = Oslo, CDG = Paris CDG, AMS = Amsterdam
Source: CAPA - Centre for Aviation and OAG

Leader on all of its top 10 routes, but LCCs are circling

AirBaltic has some strong market positions on its top 10 routes, where it is number one in every case, including five monopolies. The monopolies include Tallinn and Vilnius, the capital cities of the other two Baltic states, reflecting its dominance in the three Baltic nations. It also has a monopoly from Riga to the Ukrainian capital Kiev and to Paris and Amsterdam.

Given the Wizz Air Group's presence in Ukraine and easyJet's presence in Paris and Amsterdam (and, to a lesser extent, Ryanair's presence in Paris), the latter three monopoly routes could, at some stage, become susceptible to LCC competition. Although airBaltic markets itself as a LCC, its unit costs (CASK) are higher than LCCs such as Norwegian, Vueling and easyJet and much higher than ultra-LCCs Wizz Air and Ryanair.

See related report: Restructuring rigour from Riga: airBaltic narrows 2012 net loss

Nevertheless, LCC competition does not unduly worry airBaltic chairman and CEO Martin Gauss, who told CAPA at its World Aviation Summit in Nov-2013 that he was not afraid of Ryanair. He pointed out that the Irish LCC entered the Riga-Rome routes and subsequently left it. "They have a good contract with Riga Airport," he said, "but routes need to be year-round to fill a 737. Ryanair can't be in every niche successful."

On a city pair basis, airBaltic already faces LCC competition on three of its top 10 routes: the Scandinavian capitals Stockholm, Copenhagen and Oslo. On Stockholm, both Ryanair and Norwegian are present, while these two are joined by Wizz Air on Oslo. airBaltic faces competition from all three principal Russian operators on Riga to Moscow (although it also has codeshare agreements with two of them, Aeroflot and Transaero).

airBaltic market position on its top 10 routes by seats: 16-Dec-2013 to 22-Dec-2013

Route	airBaltic rank on city pair	Competitors
Tallin	1	Monopoly
Vilnius	1	Monopoly*
Helsinki	1	1 airBaltic, 2 Finnair
Stockholm	1	1 airBaltic, 2 Ryanair (to Skavsta), 3 Norwegian
Copenhagen	1	1 airBaltic, 2 Norwegian
Moscow	1	1 airBaltic, 2 Aeroflot, 3 Transaero, 4 UTair
Kiev	1	Monopoly
Oslo	1	1 airBaltic, 2 Ryanair (to Rygge), 3 Norwegian, 4 Wizz Air (to Sandefjord)
Paris	1	Monopoly
Amsterdam	1	Monopoly

*FlexFlight operated a single weekly frequency for a limited period in summer 2013
Source: CAPA - Centre for Aviation and OAG

A mixed fleet allows seasonal flexibility

Mr Gauss considers that airBaltic's fleet, consisting of both Boeing 737 and Bombardier Q400 equipment, gives it the flexibility to adjust capacity to seasonal demand patterns, while maintaining frequencies.

In the weaker winter season, 737s can be grounded in favour of the smaller Q400s on certain routes, while the larger aircraft can also be deployed on ski routes, for example. Mr Gauss sees this as an advantage versus LCCs, who cannot always operate profitably all year on every route.

airBaltic Fleet Summary: as at 19-Dec-2013

Aircraft	In Service	In Storage	On Order*
Boeing 737-300	8	0	0
Boeing 737-500	5	0	0
Boeing 757-200	2	0	0
Bombardier CS300	0	0	10
Bombardier DHC-8Q-402(NG)	12	0	0
Fokker F-50-050	0	3	0
Total:	27	3	10

Source: CAPA Fleet Database
* this column lists new aircraft orders placed directly by the operator and orders placed by lessors assigned to the operator

9M2013 net profit turnaround 'far surpassed' its plans

In the first nine months of 2013, airBaltic turned around a net loss of EUR27 million last year to record a slim net profit of EUR0.7 million. Revenues grew by 2% to EUR256 million, in spite of a 5% fall in passenger numbers.

For 3Q2013, net profit almost doubled to EUR13 million, with revenues up 2% on a 4% dip in passenger numbers.

airBaltic results highlights: 9M2013

	3Q2012	3Q2013	Change	9M2012	9M2013	Change
Revenue EUR million	101.0	103.3	2%	250.0	256.0	2%
Net profit EUR million	6.8	13.2	93%	-26.7	0.8	-
Passengers million	0.92	0.88	-4%	2.33	2.22	-5%
Yield per pax EUR	109.72	117.67	7%	96.41	102.28	6%
RASK EUR cent	7.91	7.99	1%	7.38	7.66	4%

Source: airBaltic, CAPA - Centre for Aviation

airBaltic says that the 9M2013 result "by far surpassed its original plans", attributing its progress to the success of its ReShape restructuring programme. This improved level of profitability has been achieved in spite of lower passenger numbers than previously planned and it remains on course to meet its target of returning to full year profit in 2014.

EU state aid investigation puts growth plans on hold

The airline's 2013 budget originally saw 2% growth in passenger numbers, but year-to-date figures now demonstrate that a decline in traffic is much more likely. It has had to revise its plans pending the EU investigation, commenced in Nov-2013, into alleged state aid to airBaltic from the Latvian Government. The passenger decline of 5% for Jan-Sep 2013 was followed by a further decline of 6% in Oct-2013. Load factor fell by 5 ppts in Sep-2013 and by 3 ppts in Oct-2013.

If the EU investigation approves the funds received from Latvia, this will clear the way for airBaltic to resume its growth plans. However, the carrier's priority is to make a profit. Mr Gauss told CAPA that he was prepared to "skip passenger growth" if the airline was profitable. After fleet rationalisation in recent years, airBaltic plans to grow its aircraft numbers to 36 by 2022 (it has 27 today, according to the CAPA Fleet Database).

If the EU rules that airBaltic must repay the funds received from the state, this would increase the pressure to find a new investor.

A deeper relationship with Etihad looks a good option for airBaltic

Mr Gauss told CAPA that the carrier could not grow out of Riga forever, but that it had the potential to do more from the other Baltic states, Lithuania and Estonia. Both of these countries have national flag carriers that are struggling and airBaltic has ideas for developing its business there. Already strong in the region, it is well positioned to build its position further in the Baltic states.

This, together with a fleet that can give it flexibility in adapting to seasonal demand fluctuations, may help to mitigate the impact of growing LCC competition. In addition, its Riga hub, already the most important Baltic transfer point, should be further boosted through the new relationship with Etihad.

It would seem that a deeper relationship with Etihad might also be welcomed by airBaltic, with or without a positive outcome from the EU's state aid inquiry. The Dec-2013 codeshare launch is a step towards closer cooperation, in whatever form.

However, none of this should allow airBaltic to reduce its focus on cost efficiency, given a CASK that is above the levels of its LCC competitors.

See related reports:

• Restructuring rigour from Riga: airBaltic narrows 2012 net loss
• airBaltic opts to acquire CSeries aircraft as part of turnaround effort