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Lithuania aviation Part 1: An innovative charter carrier changes the scene after turbulent years

There are few countries where an outright charter carrier is the de facto national flag carrier.

But that is the case in Lithuania where a succession of failed scheduled carriers contrasts with a relatively new airline that sells seats exclusively to tour operators, in several countries across continents, is expanding almost exponentially, has one of the lowest CASKs in Europe, isn't highly leveraged, and is profitable.

That is far from the only surprising thing about Lithuania though, a country that is privatising its airports without really privatising them and which, is only just beginning to wake up to its tourism potential.

Lithuania, biggest of the three Baltic States

Lithuania is the southernmost of the three Baltic States that were liberated from Soviet rule in Dec-1991. It is situated along the south eastern shore of the Baltic Sea, to the east of Sweden and Denmark. It is bordered by Latvia to the north, Belarus to the east and south, Poland to the south, and the Kaliningrad Oblast (a Russian exclave) to the southwest.

Lithuania has an estimated population of three million, and its capital and largest city is Vilnius, with 0.5 million inhabitants or 0.7 million including environs.

It is the biggest of the three Baltic States by population and in terms of area it is slightly bigger than second-placed Latvia. The total population of the three countries, at just over six million, makes them comparable to, say, Scotland, or the whole of Ireland (Eire and Northern Ireland combined), or Maryland or Wisconsin in the US. But there is a lot of ‘politics,’ and they are historically wholly independent of each other in many ways, a loose co-operation in the air transport sector being one of the few exceptions.

It should also be noted that the overall population is falling, and in fact has been since 1992, and to a greater degree than Russia. While the Baltics have frequently been presented in the media as representative of ‘New Europe’ they are collectively one of the most rapidly depopulating areas anywhere on earth.

In not a single year since 1992 has there been any population growth. The region went from almost eight million people in 1992 to less than 6.5 million in 2013 and has declined further since.

Decline in population in the Baltics since 1992

It is immediately clear from the chart above that the continuous decline since 1992 has been exacerbated since 2010. Not so much by the entry into the European Union of all three States in 2004, but by the bursting of the respective economic bubbles since 2008.

Inevitably this shrinking population is causing concern. It is mainly young and better-educated people that are emigrating, leaving behind an ageing population which will exert pressure on pension and healthcare systems.

Lithuania emerges intact from the financial crisis

Having said that, as Europe slowly emerges from recession Lithuania appears to have survived it and come out the other side a little more intact that have its Baltic neighbours.

Lithuania has in fact rebounded and become one of the fastest growing economies in the EU. GDP per capita reached USD27,000 in 2014 and GDP real growth rate has been in the 3-4% category over the last few years following a spectacular revival to over 6% in 2011. Current projections are that it should remain in that vein until the end of the decade. Meanwhile, the unemployment rate has declined from a high of 17.8% in 2010 to around 10.5% now.

GDP Growth of Lithuania (% change): 2010 to 2020*

But Lithuania’s ongoing recovery hinges on export growth, which is being hampered by the lingering economic slowdown in the EU and, more so, in Russia. Lithuania is almost as wedded to the EU as is Greece, while not exactly shaking off its links with its previous master. Its trade with the EU and CIS countries accounts for approximately 87% of total trade.

Foreign investment and EU funding have aided in the transition from the former planned economy to a market economy. Placing its faith in the European project as others openly question it momentarily, Lithuania was the last of the Baltic States to join the euro zone, on 01-Jan-2015.

There is thus a strange correlation between an improving economy and economic flight from the country.

airBaltic remains a major player in Lithuania aviation

It is within this framework that the country’s recent aviation history must be considered. Earlier, it was mentioned that there is a degree, at least, of co-operation between the States in aviation activities. The region as a whole is dominated by the state-owned Latvian LCC-hybrid flag carrier airBaltic (as it is stylised), which is based at Riga Airport. AirBaltic is notable for having being the first flag carrier to promote itself as an LCC, a foretaste of things to come: nothing can be taken for granted here.

While it is based in Riga it also operates a base in Tallinn, the Estonian capital, and has been operating at Vilnius since 2004, nine years after its formation as a joint venture with SAS. As time has gone on it has also moved away from offering mostly point-to-point services in the Baltic region, and now pursues a network strategy, with Riga International the main hub.

AirBaltic maintains close links with SAS even though there is no longer any equity participation by that airline, operating frequent services to the latter's hubs in Copenhagen, Oslo and Stockholm, thereby facilitating a ‘dual hub’ system with Riga. The airline operates scheduled services to destinations in Europe, the Middle East and the CIS. 

Lithuania has the largest amount of seats available for sale internationally outside of Latvia in airBaltic’s network and Vilnius (IATA - VNO) is the second biggest international route, again as measured by seat supply.

airBaltic international capacity share (% of seats) by country 14-Sep-2015 to 20-Sep-2015 

 

airBaltic top 10 countries by seats: 14-Sep-2015 to to 20-Sep-2015

It is for these reasons, together with the arrival of Western European low cost airlines into Lithuania, that Lithuanian scheduled carriers failed to establish themselves.

While airBaltic is a major player at Vilnius Airport for example, it is dwarfed by the capacity made available by Wizz Air and Ryanair, which collectively have almost 50% of seats.

Vilnius International Airport capacity share (% of seats): 14-Sep-2015 to 20-Sep-2015 

That degree of participation by LCCs is unlikely to diminish while so much of the traffic comprises budget-minded VFR passengers, including those that have settled abroad.

The two most notable failures have been those of flyLAL (again as stylised), and, only this year, Air Lituanica.

flyLAL – wrong fleet, wrong model, but with a spin-off charter airline that has worked

FlyLAL (otherwise known as Lithuanian Airlines or just ‘LAL’) came into existence under another (Lithuanian) name as a state-owned national flag carrier in Sep-1991, shortly after independence was gained. It operated out of a main base at Vilnius both domestically and internationally. It had something of a chequered history, inheriting Soviet era aircraft from the Aeroflot fleet based at Vilnius. Shifting operations westwards and privatising (in 2005) it came into tough competition, especially with SAS and Lufthansa, then a price war with airBaltic.

Despite managing to increase passenger volume even as the global economic crisis grew it ran up debts of EUR25 million in 2008. It offered 51% of its equity to the government for a nominal sum but the offer was rejected. A preliminary agreement with the company Swiss Capital Holdings for the sale of 100% of the shares then fell through when a life-saving advance was not made and a further attempt to secure a government bailout met a similar fate.

FlyLAL ceased operations on 17-Jan-2009, with CAPA noting ‘unfair market conditions, record high oil prices, low winter travel demand and the wrong fleet’ contributing to its downfall. Towards the end flyLAL had sued both airBaltic and Riga Airport for ‘unfair competition.’ As in the case of the failed Malev (2012) and Budapest Airport in Hungary, traffic at Vilnius Airport was badly affected, declining by over 40% in the aftermath. 

The airline’s CEO, Vytautas Kaikaris, stated at the time that, “Being the citizens of the Republic of Luthuania we are sure that only (a) national carrier can secure the interests of the state itself. Therefore flyLAL - Lithuanian Airlines is open for further proposals, which can secure further direct flights from Vilnius to various destinations.”

As it happens though, the scheduled route was not the one that was taken. Even as flyLAL closed down its sister airline, flyLAL Charters, continued to operate under a separate licence, subsequently being rebranded in Jul-2010 as Small Planet Airlines, under the stewardship of Mr Kaikaris.

Following on from FlyLAL was JSC (Joint Stock Company) "Star1 Airlines," an LCC founded in 2009. Owned by the Star Team Group, which was also an owner of the tour operator Star1 Holidays, it operated both scheduled and charter flights from its base at Vilnius but again fell foul of financial difficulties and suspended operations on 01-Oct-2010.

Air Lituanica – a municipally owned airline

The third start-up that was unable to sustain scheduled operations was Air Lituanica. Registered in May-2012, more than three years after LAL’s demise, and established a year later to match the Lithuanian presidency of the EU (2H2013), it was owned by Air Vilnius Group then subsequently Šiaurės miestelis, a subsidiary of the Vilnius municipality. It was effectively an airline owned for and on behalf of the city of Vilnius though the intention was to attract private capital as well. 

Air Lituanica had an early arrangement with Estonian Air for distribution but it fell apart amidst rancorous allegations of missed payments by both parties as the airline built up its network from the initial Brussels and Amsterdam to include cities in Germany, the Czech Republic and the UK. The operation of an Embraer E170 which was flown by Estonian on behalf of Air Lituanica was terminated.

More significant was the fact that the airline’s liabilities began far to exceed its assets. It ceased operations on 22-May-2015, subsequently filing for bankruptcy on 08-Jun-2015, just two years after starting business.

Negotiations for a sale quickly fell through. Lithuania’s President, Dalia Grybauskaitė, blamed its failure on being a municipal company, which always needed subsidies to survive and which was never going to generate a profit. She went on to describe it as a ‘reckless’ scheme, one in keeping with others initiated by a former Mayor of Vilnius.

Lithuania’s President vows never again to support a flag carrier

She also went on to say that the Government had no intention of supporting a flag carrier again. The country had made two attempts (not counting Star1 Airlines) and that was enough. No model has been proposed that would avoid losses, let alone make a profit, and the Lithuanian people should not have further losses imposed on them.

At the same time the Transport Minister spoke of a potential investment into airBaltic. Most of the senior executives in the aviation business in Lithuania seem to support this view.

AirBaltic has come out of these events smiling. It declared itself “well placed” to function as a pan-Baltic carrier as a result. And with traffic at Riga Airport expected to reach record numbers in 2015, exceeding its previous high of 5.1 million annual passengers one can see why.

But the airline also stressed it has no plans for further expansion of services in Lithuania, which seems a strange contradiction, especially when it already has done (services from Vilnius to Stockholm, Berlin, Brussels, Paris and Amsterdam all commenced in Sep-2015) and the latest indications from senior management hint at more in the future.

So the bottom line is that the prospect of a national scheduled carrier, flying out of Vilnius or any other airport and ‘underwritten’ by the government is simply not on the cards for the foreseeable future. At the same time private sector would tread very warily over such as prospect.  AirBaltic has expanded its operations a little and the needs of scheduled leisure travellers are met up to a point by the activities of Wizz Air, Ryanair and others, supported by occasional services operated by European flag carriers.

Small Planet Airlines seeks to be the charter carrier of choice within the European market

But all is not lost by any means. Arising out of these events (and specifically the demise of flyLAL) is Small Planet Airlines Group (SPAG), which has quietly gone about establishing itself as one of Europe’s leading charter carriers with a mission to be the charter carrier of choice within the European market. SPA believes that charter operations are becoming popular again and that the decline in the market across Europe is being arrested. This belief is underscored by the fact that it regards the likes of Poland’s Enter Air, or the Czech Republic’s Travel Service as its competitors, rather than the LCCs.

The Group and airline were set up by flyLAL’s CEO and SPAG subsequently recruited role-specific experts from across Europe, including an Icelandic CFO with experience at Air Atlanta and Excel Airways. One of the most recent recruits is the previous Commercial Director of Air Lituanica.

The Group is headquartered in Vilnius, in an older, converted office block that was intended to make a statement that the airline is not an ‘empire builder’ with an ‘edifice complex,’ in a similar way to, for example, easyJet and Ryanair, each with their own functional office space. There is a small but ultra modern central business district in Vilnius but location there was no considered to be appropriate.

SPA operates solely as a charter carrier on behalf of tour operators (100% seat sales) in all its markets. Those operators take the risk on fuel prices; SPA does not hedge. If the oil price goes down the tour operators benefit. If it goes up they take the hit. Right now they are happy.

SPA is, though, considering ‘part-charter’ operations’ in some markets, i.e. the direct sale of spare seats to the public. This is a far cry from scheduled operations. The attitude appears to be that while ‘never say never’ should be the watchword for that, it would take a quantum shift in operating circumstances for the airline to take on that role.

The Group is the holding company for SPA’s operations in Lithuania and Poland. It is owned by Vytautas Kaikaris (majority shareholder) and Andrius Staniulis and holds a 100% stake in Small Planet Airlines UAB (Lithuania) and a 90% share of Small Planet Airlines Sp. z o. o. (Poland). Small Planet Airlines UAB also holds a 25% stake in the business charter operator Klasjet.

In Dec-2014, the group announced that it would launch a subsidiary in Thailand and also announced the establishment of a new German subsidiary (Small Planet Airlines GmbH) in May-2015. SPA also began in late 2014 a partnership in Cambodia where it now has a seasonal operation.

Majority-owned members of the group include:

All financial statements are consolidated in Lithuania.

But the launch of the German subsidiary has been put back until May-2016 while the process of obtaining an AOC in Thailand has been delayed due to Thailand‘s DCA being downgraded by ICAO in early 2015. Thailand for the time being is not considering any new AOCs.

Poland is the key market

The main market for now is in Poland, where there has been strong growth in recent years. The UK is also an important market, with established operations at London Gatwick and Manchester airports in support of tour operators. For the first time in Europe this winter (2015/16) SPA will fly out of Gatwick, mainly on behalf of ski vacation operators and to the Canary Islands.

Slow growth is anticipated in Poland with static conditions in Lithuania itself, where SPA is the largest charter carrier. Italy is a less important market at this time.

The growth experienced by SPA since it started operations under that banner in 2009, and during the last two or three years in particular, has been dynamic and contrasts eye-poppingly with the performance of the scheduled airline flyLAL.

It claims to be one of the fastest growing independent leisure airlines in Europe, servicing many of the leading tour operators.

SPA Growth – Pax, Fleet, Revenues and EBIT, 2012-2015

 

2012

2013

2014

2015 (Est
except for fleet)

Growth 2012-14
(15 in the case of fleet)

Pax

635,118

1,000,705

1,212,583

2,000,000

191%

Fleet

6

8

11

18

300%

Rev (EUR, m)

81.55

125.85

130.54

176.0

62.5%

EBIT (EUR, m)

(-2.32)

1.7

8.1

14

>800%

EBIT margin

<0%

1.35%

6.2%

7.95

>6.2 ppts

However, in 2014, a brake was quite deliberately applied in order to consolidate and to focus instead on quality of product and performance, hence the comparatively small increase in passengers and revenues between 2013 and 2014.

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