Airline CEO Interview - airBaltic

Transcript

Michael Bell:Well, honored to spend a few minutes with you today in the company of Martin Gauss, one of the real leaders in our business, and I'm sure in the next 30 minutes or so you'll see why I certainly believe that, and he'll share some of the developments issues, innovations underway at airBaltic, the airline he's been leading for over a decade now. So Martin, thanks for coming down and being with us today in Gibraltar. We will leave a little time at the end for questions, so if, you know, you hear something you want to follow up on, please keep those in mind and I'll reach out to you with about 5 minutes left. Of course, you can catch Martin afterwards. So airBaltic is not an airline everyone knows, but it's an airline everyone should know. I think just like Gibraltar punches above its weight as a country, as we heard, I think so does airBaltic. It's the national carrier of Latvia. Over 70 destinations, quite impressive. We'll talk in a few minutes about some more southerly destinations you guys are moving to as well. 36 airplanes, Airbus A220. Operator exclusively, and the single largest operator, if I'm not mistaken, Martin, of the type in the world, right, which is quite interesting. It's a joint-stock company. The state has a majority share, but there are private shareholders as well, and has been recognized for numerous things over the years. We do airline strategy awards, recognized you for sector leadership in in what you've done. So, you know, kudos to you, Martin. It's really quite an impressive story that you've pulled together there. Like all airlines, you're facing your share of issues. So let's talk about a few of those. You know, the war in Ukraine has had an impact on your business, particularly I think you guys do a lot of east-west connections. Let's start with that and tell us what's been the impact on you guys. Why has it been more severe than maybe some of the other airlines?

Martin Gauss:First of all, thank you for all the praise. You said all the good things. We should finish now and I can walk off.

Michael Bell:Any questions?

Martin Gauss:Because you said all the good things. No, we have, of course, been— so we had COVID like everybody had, but then we had, when that was just coming to an end, the war affecting us, I guess, more. Maybe Finnair is as affected as us than anybody else, as we were a gateway between East and West. So we had a lot of business in Russia. And Ukraine was a strong market. In total, this year we were planning before the war to have 10% of the revenues coming from direct passengers from these 2 markets. That has gone to zero and will stay at zero. So we had to take a decision what we do, not knowing how long it would last at the beginning. Then we, we took temporary measures, wet-leased out aircraft to others, but we also at the same time looked at what can we do not having that connectivity in the hub anymore. And we have adjusted, and I'm very happy we just reported the 3rd quarter results. We are exceeding our expectations from the time before the war. That doesn't mean that it's not still affecting us. The effect is still there, but we have been managing out of COVID like everybody else, and then finding ways of deploying our aircraft either for others So I'm very happy now, and actually industry is still a bit negative. We have all these negative numbers. I'm very positive now because after what we've gone through with, with the war impacting us so much, if we can overcome that, I think we're on a good path out.

Michael Bell:Well, educate the group a little bit on the airBaltic business model. I mean, Russia's, as you said, 10%, Russia-Ukraine combined. What's the rest of the business? How much of it is East-west connecting, or what's— what markets are you guys focused on?

Martin Gauss:So we have only Airbus A220-300. We were the launch operator 6 years ago. So that brand new aircraft, which is currently advertised as the greenest or the cleanest, we have it already for 6 years, a good experience with it. We will only have these aircraft going forward, getting another 12 in the next 12 months. This aircraft is the backbone of what airBaltic does, and we are a hybrid low-cost carrier, some— a term which people don't like, but we have a full-service business class and an ultra-low-cost economy. And we do this for the last 11 years in the same way. It works very well because we have 24 codeshare partners. Basically all the larger airlines are codesharing with us, and we are serving every capital, nearly every capital in Europe and the business centers, but we also And that was the shift after COVID, do a lot of leisure flying. Based in the Baltic States, it's similar to Gibraltar. There is— the only way out is a plane because you can reach by car and train. There's no connectivity on the train yet to Europe. By car, you either hit Russia or the sea. So you need a plane. And that is an advantage for us, making us very powerful. We're the top exporter in the country. One of the largest companies there. What we do, we do leisure and we do connectivity because we fly a lot, as you said earlier, a lot of destinations from the Baltics. And we've built an excellence in combining the business class product with the low-cost product. Keeps our cost low, but we still offer—

Michael Bell:The low-cost product is unbundled?

Martin Gauss:Yes.

Michael Bell:Airbones pricing, focus on ancillaries, etc.?

Martin Gauss:So you have the lowest ticket prices as you would expect it from an ultra-low-cost carrier, but you can also find a quite expensive business class ticket. So we combine both, which people keep telling me doesn't work. It works very well, maybe because the aircraft has only 150 seats. It flies 30-minute sectors as well as 7 hours. The longest flight we did was back from Dubai against the wind, 7 hours 51 with passengers, a regular flight. So the aircraft is, is the backbone of what we do. We have, for that model, we do the right aircraft. If we would have more passengers, it would be the wrong aircraft. But we, we are doing it, and just Croatian Airlines announced to take the same aircraft to do something similar at a different part. And I think we will see more airlines which are focusing on connectivity to go for such a model. So we were just first and then have an expertise.

Michael Bell:Is the notion to build the network around the airplane. I say that, you know, for years people would say, well, Southwest Airlines, why don't you fly this route? They go, well, we kind of operate the 737. The question is, where can we make money with the 737? Is that how you guys are looking at it with the A220?

Martin Gauss:So when we first ordered it in 2012, the aircraft wasn't built. Then it came and we saw it is very efficient, but at that time we were not clear that we would change to only that aircraft type. What made it clear then looking at the turboprops which we were flying and looking at the cost benefits of having that jet and then the ability to fly long routes with it. So for us now, the aircraft is not a limitation unless you want to go long haul. We are discussing each year, could we not have for the summer 3 A321s which everybody would like to have in the peak season, but then we say no, let's not do that, keep the simplicity of a single fleet. Because the benefits of this as we grow will be larger than adding an additional fleet. So going for a single fleet similar to Southwest, to Ryanair, gives you huge benefits, which we are seeing now after COVID, because before we didn't have that.

Michael Bell:You mentioned having to pursue new markets as a result of the Russia and Ukraine situation. Notice the number of your new destinations are southerly. Tenerife last year, Marrakesh, Gran Canaria. Is that in response to this, or were these just natural growth markets for you as the people up north want to get away from, from the cold and the darkness?

Martin Gauss:Yeah, so of course if you're in Riga and you're today in Gibraltar, that's a big difference. 25 degrees the difference should be today. People want to go south, of course, and we couldn't reach the Tenerife We couldn't reach Dubai before, we didn't have that aircraft. So now obviously in winter you're trying to take people as south as you can, and that makes us fly now very— for some people that would be long-haul if you fly 7 hours, but we do that with the same aircraft we do the short-haul. And the aircraft is very efficient on the fuel flow, so otherwise you couldn't do it because you could— we were still competing, our main competitors Ryanair followed by Wizz Air, so these are the 2 main competitors. But we're doing well. So we, we fly from the Baltics. We are by far the market leader there, and we maintained it before. So we established that position, we maintained it before the crisis, and we are still the market leader today. But we had to adjust and go like everybody else through a deep valley.

Michael Bell:The A220, you know, formerly the CSeries, was always sort of positioned as a big regional airplane. How are people responding to being on a big regional airplane for that length of haul? That is a long time.

Martin Gauss:If you're sitting in Emirates business or first class and then you come on our— so you take the Dubai flight for 6 hours and you're on our aircraft, you're not as happy because they have a different business class. But if you sit in our economy, you're as happy as you are with a long-haul carrier, so that's fine. But we cannot deliver a first or a business class on that aircraft on the routes we fly, and that's okay because passengers who book us have significant lower ticket prices for that kind of service.

Michael Bell:It's a different expectation.

Martin Gauss:But on the Dubai route now for the winter, we fly 6 times a week. It's, it's a very, very nice load factor, so I'm very happy with it.

Michael Bell:How are these new routes doing for you guys? What's been the response, Martin?

Martin Gauss:As all my colleagues say, they know what is happening the next 8 weeks but not beyond. So the next 8 weeks, we're very happy with everything we have there, the pre-bookings. I can't see Easter figures yet. So like all my colleagues can't. So Easter is far away, but I can say that everything looks good for December. And January, of course, seasonality— January is not a good month, but it still looks better than I thought 2 months ago. But the issue today for airliners— and I was in Brussels with the A4E colleagues— we all only can really say something for the next 8 weeks out. You cannot really say what is happening in summer, but in general, I think we're all positive now. Because recession, high energy prices, all of these things kicking in in Europe have not led for the passengers to stop booking. So they're still booking today as they did, and I think people have understood that flying is something they want to do, and maybe as prices have gone up a little, they value it differently, and rather than spending for another dinner, maybe you save the money and say, I'm going on another trip. So that's something we see, leisure-driven, that people want to fly because it's still very, very affordable to fly 3 hours through Europe because you still pay less than you pay for a dinner.

Michael Bell:What are the inhibitors to growth for you guys? Is it pilots, aircraft availability, ground handling support? I mean, as you think about growing your airline here, what keeps you up at night?

Martin Gauss:So, so far For us now, it's a supply chain issue, is a big issue for us. So we cannot fly as much as we would like to because we have engine issues. So we do not get the engines back from overhaul because they do not have the stuff and the parts to do it. So that's for us the biggest issue. An issue coming is for sure the restriction we have in Europe on airspace. So this never-ending story about single European sky. So these are 2 restrictions. For us in airBaltic, labor is not an issue. We have no problem. We recruited nearly 1,000 people since COVID is over, and we don't have an issue. We don't see that as an issue. I think availability of aircraft and then spare parts, that's going to be an issue for the next at least year, as we can see with the engines. As we already fly for 6 years, we have a lot of engines being shipped out for maintenance, and they're just Instead of 6 weeks, they're coming back after 8 months, and that is hitting you as an airline.

Michael Bell:That's hurting your capacity. You have airplanes on the ground.

Martin Gauss:Yes, we have 8 airplanes today on the ground without engines, and you would call them brand new airplanes, but they're already up to 6 years in operation. Engines have to go for maintenance, and then with the supply chain issues kicking in, you just don't get these engines back.

Michael Bell:You guys are innovators. You'd maybe try the glider route.

Martin Gauss:Yeah, so no, innovation is good, but not if the engine doesn't back from the shop. I love the engine, but the engine is not coming back from the shop. And that is an issue. It's not only for us, it's now for more and more airlines. And I think that will be with us for another year.

Michael Bell:How's the airline doing financially? We were talking earlier, you inherited, what, 11, 12 years ago, a bankrupt company and seemed to be doing really well leading up to COVID. Why don't you walk us through a little bit the financial story at airBaltic?

Martin Gauss:Yeah, so 27-year-old company. First year was 19 employees at the end of the year. This year we will have the largest number, 2,200 employees. Revenue generated, best one we had was 2019, exceeding €500 million. This year close to €500 million. So after that time we're back. Will be still a big net loss this year, but EBIT first The first 9 months was positive. So we're coming back on the financial figures, but we saw it earlier, we are recovering from a time which was not seen before. And outlook for the future, we follow the business plan which will take us to the stock exchange, and in 2027 now airline's still targeting above €800 million in revenues and significant EBITDA levels, which hopefully enables us then in 2 years' time to go to the stock exchange.

Michael Bell:So an IPO is still the plan?

Martin Gauss:It's a must now because we got the state aid approved in 2020, which we— which the state got shares, they put equity in. We have— the state has to sell their shares to get that equity back, and the government identified the IPO as the solution for that. We're preparing for it already, and we believe the earliest time to do that is end of 2024 if we current— if the current situation continues.

Michael Bell:If you can show the positive results on a sustained basis.

Martin Gauss:Yeah, we, we were there in '19 already, so we were, we were basically preparing to be in '21 at the stock exchange, then COVID came. So now we have a 2-year delay, and speaking today, I would say it's very realistic that we try that end of '24, which would be the first IPO of an airline after Wizz Air, which then in '24 would be 10 years later.

Michael Bell:That's quite remarkable really, that length of time would have gone between IPOs.

Martin Gauss:I think it will— we will be watched on doing this, and a lot of people will look, is that something which is still possible for an airline in Europe to just list at the stock exchange? Because I think it will not be easy as an airline to explain and have the story, because You're competing with any other industry, and financial investors will look very careful on how how that airline will make a difference and how they will benefit from that IPO. So we are preparing. Story is important, but you have to have solid numbers and something which in COVID was a little bit delayed coming back now: sustainability, net zero fuel flow. On that front, we did a smart one because the Airbus is is Actually, a superstar.

Michael Bell:I was going to ask you, how do you expect investors to respond to an airline investment given all the pressure on airlines in Europe around sustainability and short-haul travel, etc.?

Martin Gauss:In general, airlines attracted investors if we look at all the companies in the past, so why not also in the future? Because it's— if you invest in an airline, you are investing in something you know. It's not, it's not a startup. I think sustainability for all the investors will be a key argument, and we are, as the industry, we are a little bit ahead, not only on fuel and emissions because of the aircraft. Also, we got this year the Diversity and Inclusion Award as being 50% led by women, so the company is really on that front well ahead. Our company car fleet is full electric already, and so we're doing a lot of little things there which we can, because if you're a small airline, you can go faster. We do innovations, we're on the blockchain. Story-wise, I think we are okay for investors. We just have to then also show the hard numbers, because at the end of the day, no story works without numbers.

Michael Bell:But you'll be able to tell a broader story of which diversity, sustainability is part of the value proposition.

Martin Gauss:Looking at our brand name, it has a very good name already now while the industry is in a crisis, and, and we will be building on that going forward. But I have to always say, it doesn't help if you only come up with innovations. You also have to show the passengers the revenue and the profits.

Michael Bell:Let's talk about innovation. In preparing for this, I was fascinated to read about, read about the Planes. So NFTs, non-fungible tokens, But the whole blockchain trend, if you will, you have clearly taken a very sort of positive, you know, proactive step in that direction. Tell us about this approach and how it's tying into your loyalty program as well.

Martin Gauss:Yeah, we get a lot of attention on that. I was in Silicon Valley speaking on a conference, invited there for, for talking about our blockchain stuff. We have 2014, the CFO came to me and said, what about— what do you think about accepting Bitcoin as a form of payment? I had no idea what a Bitcoin was in 2014. We did it, successful. First airline accepting Bitcoin. Over the years accepting other cryptocurrencies, it became a form of payment. And in 2021, similar situation, and the NFTs came along, non-fungible tokens, blockchain. As we already had a lot of knowledge, let's say, on blockchain issues. We tried it and did a marketing NFT. We issued something for marketing purposes. It was sold out pretty quickly, the NFT of airBaltic, the first one. And then we said, okay, how can we combine this and the company can benefit from blockchain? And we were looking in, ideally tickets should be NFTs, right? Everybody would love to have that. But then we looked at all areas in the company, maintenance department processes, where would blockchain technology help us most? And then it was identified that the frequent flyer program is the best fit. So we issued a 10,000 plane collection, which is a cartoon airplane, each of them a unique one. And when you own that, then you own an NFT and you have various benefits in the frequent flyer program. And I was in San Francisco talking about it and showing there that by owning a plane in San Francisco, it makes a lot of sense because you can go with the points you get without ever flying on airBaltic.

Michael Bell:Just take 2 minutes and explain exactly how it works. Someone buys the token for $100 or so. Walk us through it.

Martin Gauss:So you buy yourself an NFT, a non-fungible token, on OpenSea, or at the moment you can still mint them for around $100. And then all you have to do, you have to stake it, which means you give it to the frequent flyer program. You still own it, but you get every day the equivalent of spending €20 on airBaltic in points, frequent flyer points. So you never have to fly on us, but you get the benefits of a frequent flyer over time, and after 1 year you have a free ticket. If you buy yourself several of these Planies and collect the points, and that's what I showed in San Francisco, you can go San Francisco Riga for free on one of the partners, partner airlines. So what we showed there is that this technology you can combine with the frequent flyer program. It works today, and we are taking further steps on that as we go. So we have already on the roadmap in that program a lot of steps coming where the tokenization of the frequent flyer program is the target, and the learnings from that then go into the other areas where blockchain today is not, not a subject.

Michael Bell:But what's the benefit for the airline? It sounds like an interesting value proposition for the consumer. I'm gonna buy one myself. What's in it for you guys?

Martin Gauss:So if you now buy one, or everybody here buys one today, we make $100 net profit because the program is basically already there. We have no extra cost for it, and you give us $100. It's the biggest ancillary revenue Yeah, it might be one day, but no, what it is, for example, in the frequent flyer program, a lot of changes are happening there, and I think we are leading because that's the feedback I get, and we have an in-house knowledge which we use then also for other things we're gonna do on the blockchain. So I'm not doing any advertising for Planes. I should sell airline tickets, but I tell you, it's much more interesting to talk about that than selling airline tickets.

Michael Bell:I have to imagine it's helping you guys with this sort of bigger-than-reality profile too, because people say, oh, look, here are these leaders, not just on diversity and inclusion, on the 220, but now on blockchain, right? Is it providing you with some halo effect in terms of raising the profile of the company?

Martin Gauss:Yes, because I had US carriers meeting me there in Palo Alto, and we had an evening event at the 49ers stadium stadium with different airliners, and then all of them bought one. So I was able to convince the other airliners to buy a plane, and I just checked in the morning because we checked in the evening, did anybody buy, and 5 were sold last night, and I'm very sure tomorrow another 10 will be sold by you guys.

Michael Bell:So, uh, you're not giving them away at the event?

Martin Gauss:No, no, no, it's actually, if you know about NFTs, it's much too cheap, but as they are still in the mint days, you still get them for $100 and you get a free ticket if you keep it for a year. But what we learn is the key there. It's not the money we make, because there's only 10,000 of them and that's it. There will be no more. But what we learn about this is incredible. Also that the energy in the company, people dealing with it, it's all done in-house. And airBaltic has that spirit of we are young, we are small, we are very agile, and with these kind of things, you get the attention in-house because our staff could buy it cheaper in the beginning, and of course they're all showing each other their planies. There were big happenings. 2 of my colleagues here, when the department said, which one did you get, which one did you get? So they're exchanging how they look. It's a dynamic which also helps the atmosphere in the company.

Michael Bell:You're pioneering.

Martin Gauss:Yeah, definitely.

Michael Bell:Martin, before we turn it to the audience for any questions you might have, let's talk about the diversity inclusion. I think you and I have had several conversations about airBaltic's progressiveness in this regard. I mean, you have not only signed up for the IATA pledge, which I think you guys blew through in no time, you probably were there before you signed up, but you have been very, very proactive about this. I think, you know, half of your leadership team is women. I think you've actually— 60% of your promotions are women. You're definitely on the gender side and on the ethnic side taking real action. Tell us about the philosophy around that and how that forms part of the culture of airBaltic, if you will.

Martin Gauss:There's no philosophy anymore about it. It is today fully natural. When we signed the pledge, 25 by 25, we were at 50 already. So it's not— and we live that, so we don't have to do anything. And I think the award we got was just a result of us living it. I was running a panel discussion on Wings of Change in Istanbul where there were 2, and I say it now last time again, female CEOs, and I was the moderator. And then Pegasus Airlines CEO, she said to me, has ever somebody called you a male CEO? Yeah, and I said, no. So there's nothing like a female CEO, there is nothing like it has to be like this, a quota. We just live the gender diversity without doing anything special. It's natural now. It's part of our company and I hope it will be part of all companies in the world because you get— our industry, you have access to 50% more labor if you just open up and that is something which we feel and the way airBaltic is, it has to do with the way we are. But that wasn't set up by me. I have no recipe for it. It's just naturally the company as is. I'm not supporting it. It would be stupid. There sits this old man, right, and says, I'm supporting women in aviation. No, I'm just letting it naturally happen, and that leads to what we have in airBaltic, which means we have 70 managers, half of them are women, and we have in the— we are 11 senior managers running the airline. and half of them are women. So, and that, but that, that is like it is, and we go for qualification only, but we wouldn't, we wouldn't have any like plan of not, not to have a woman taking the job. We, we are beyond that point already.

Michael Bell:We, we did a study with the industry a few years back called Soaring Through the Glass Ceiling about gender diversity. I think we talked to you guys about that, and What women said was one of the biggest inhibitors is just the sheer lack of women in leadership roles. I have to imagine it's a bit of a self-fulfilling prophecy. When you have them, women say, oh, this is a progressive company and more women will come or see opportunities to stay with the company. It becomes a virtuous cycle, if you will, is it not?

Martin Gauss:A very good example was we had the tattoo issues that you couldn't have tattoos visible, which you have for cabin crew normally or gate staff, and then we changed that. And said, of course, show us, we meant the opposite, show us your tattoos. And we got so much more applications that week when we published that because people said, I want to work for that airline. And that shows it, right? If you are diverse, you open up opportunities for yourself as well because I have a much wider pool now of people. You can still discuss it controversially if you want to, but actually our service hasn't changed.

Michael Bell:Now people Well, we're going to be watching the IPO space carefully, but also going to be watching the Martin Gauss ultimate CEO succession space carefully. Maybe, maybe you'll have a woman coming in as the next leader of airBaltic.

Martin Gauss:Would be good, would be good, because I think there's not enough yet in our industry, not enough women running airlines, and I think it will do good to our space if we have more diversity in general. Terrific.

Michael Bell:Let me open it up to the audience. Who has questions for Martin about everything he has going on at this wonderful airline?

Martin Gauss:Guys, website for planies, you should have that question at least.

Michael Bell:Who wants, who wants a plane? I actually was— I am serious about getting one, Martin, because I think for me, Not being a guy in the NFT space, it's good learning also to participate in that economy, if you will, and to learn from that, right?

Martin Gauss:So yeah, I think blockchain is something we will all be confronted with, and the NFT space is an easy space to learn it. So it's easier to learn it through an NFT than trying to go into scientifically into blockchain because it's fun. So if you interact with an NFT and you do this once, you are reading about it and then it all gets logical, because if I explain it to somebody, they all say, how on earth? But when you interact with an NFT, then you learn.

Michael Bell:Yeah, exactly. Well, I'm gonna, I'm gonna give you a wrap-up question, which is, you know, you've done great things, but I'm sure you still worry. It is the airline industry. But what is keeping you up at night? Is it, is it your engine issues, or what do you worry about, Martin?

Martin Gauss:Actually, I have very good sleep. My— I have this, this sleep tracker ring, and it's at 85%. 5 score last night after the cocktail reception, so that's okay. I'm not awake at night. But yeah, I want to, I want to show with the team that the airline coming out of the crisis is doing successful, the IPO, and then has a successful future. I think that, that would keep me up because I really want to achieve that. I'm 30 years now in the industry. I'm running airBaltic for 11 years, and that is really something which drives me, which I have grown-up kids, I'm now able to focus on that, and that is what I want to do. And with that, then when we achieve that, I think I have set a good foundation for the company to continue further.

Michael Bell:I think we do have a question. Monserrat.

Martin Gauss:Hi, this is Monserrat Barriga from ERA. I just have a question for Martin because you talk about diversity something very natural, but I'm sure it didn't start so naturally at the beginning. If you had to give a couple of, you know, examples or advice of initiatives that airlines should implement to start with and make it one day as natural as for airBaltic, that would be really helpful. Thank you. I can turn to what IATA does by just signing the pledge, which you can do anytime, not only on the public events, to say okay, because then there's a lot of things happening to You signed it, you feel good, you communicate about it in your airline that you signed the pledge 25 by 25, and by just doing this you will learn a lot, and certain things is just by changing the way how you accept applications, by telling your HR department that you signed that, there will be an automatic flow of things happening. So I think that is the easiest way, and I hear this now from a lot of airlines who sign, if you do it on any of the IATA events, you get a selfie with Willy Walsh, so that's also a benefit of it. So that was actually last time the run on the stage that everybody had a selfie with Willy. There's nothing special, I would say, because just starting it, it's, it's a journey, and then you will learn from it as you go.

Michael Bell:Any others? Well, if not, let me just ask everyone to join me in thanking Martin for taking the time to come down to Gibraltar to share the great story unfolding at airBaltic. It's clear to us that you're doing great things with this airline and providing strong leadership, not just to the, to the airline, but to the industry as well. So Martin, thank you very much.

Martin Gauss:Thank you.

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