This is the second in a series of reports on the Lithuanian aviation market. The first report focused on the evolution of the Lithuanian airline sector and the emergence of Small Planet Airlines (SPA) as a de facto flag carrier although it operates entirely as a charter airline on behalf of tour operators.
This will report will examine further growth opportunities for SPA, which for now is focusing on overseas markets in particular Southeast Asia. It will also review potential opportunities for growing Lithuania's tourism sector and for privatising and developing Lithuania's airports.
As CAPA highlighted in the first instalment in this series of reports SPA carried 1.2 million passengers in 2014, generated EUR130 million in revenues and turned an operating profit (EBIT) of EUR8.1 million. The carrier is projecting 37% revenue growth for 2015 compared to 9% in 2014 as it takes delivery of seven A320s. It aims to carry 2 million passengers this year and turn an operating profit (EBIT) of EUR14 million.
Small Planet Airlines' operating costs are on par with LCCs
Financial results for 1H2015, which were released on 10-Sep-2015, indicate SPA is on track to achieving its targets. Revenues were EUR64.3 million and EBIT doubled from EUR2 million to EUR4 million. The majority of the summer vacation period in Europe falls in 2H2015.
Perhaps the most surprising financial statistic offered by SPA is its very low CASK (cost per available sales kilometre), which is claimed to be the third lowest in Europe after Wizz Air and Ryanair and ahead of Pegasus. Based on SPA‘s own calculations, its CASK is EUR3.81 cents (USD4.29 cents) compared to Wizz Air‘s of 3.72 (USD4.19 cents) and Ryanair‘s 3.43 (USD3.87 cents); and therefore better than Pegasus' 3.90 (USD4.40 cents) and Transavia's 5.11 (EUR5.76 cents).
CAPA's recently published CASK database for 2014 has these three scheduled LCCs in a similar range if a little higher than in the SPA calculation. SPA is certainly operating in a competitive ballpark.
Small Planet to add four more A320s in 2016
SPA currently operates 16 A320s in 180-seat single class configuration with an average age of 14 years. It also has two ageing 737-300s in its fleet but these will be phased out shortly.
Small Planet Group average fleet age as of Sep-2015
Four more second hand A320s are being added in 2016, which will give Small Planet a fleet of 20 A320s at the end of 2016. The airline has already tripled the size of its fleet since 2013, when it operated only six aircraft.
Most of SPA's growth in recent years has been in Poland, which now accounts for 60% of the airline's business. SPA also operates charters from the UK, Italy and its home market of Lithuania. Spare capacity is allocated to ad hoc charters for national delegates and athletes as well as to private reservations.
Small Planet to focus growth on Southeast Asia
The airline is now relying heavily on Southeast Asia to support future growth. It recently opened an office in Bangkok and SPA CEO Vytautas Kaikaris is now based in Bangkok and spends most of this time pursuing opportunities in Southeast Asia.
SPA placed three of its A320s in Cambodia from Dec-2014 to Mar-2015 as part of a partnership with Cambodian leisure carrier Sky Angkor. For the upcoming northern winter season SPA will place four A320s at Sky Angkor, which uses SPA aircraft and crews to supplement its own operation during the peak season for Cambodia's fast-growing tourism sector.
The aircraft are subleased to Sky Angkor and put on the Cambodian registry but SPA supplies crews and maintenance. As in the case with SPA's European customers, Sky Angkor assumes all the risk and sells all the seats (in this case to travel agents in growing North Asian source markets).
SPA is keen to further build its presence in Southeast Asia through similar partnerships and potential new operators' certificates. As outlined in the first instalment in this series of reports, SPA has been working on applying for an AOC in Thailand although that process had to be suspended after ICAO raised concerns with Thailand's DCA in early 2015. Thailand is currently not accepting new AOC applications but SPA will be ready to lodge an application in 2016 once a new system and requirements for new AOC applications are in place.
SPA could also potentially acquire or partner with an existing airline in Thailand. In the meantime is also exploring opportunities in other Southeast Asian countries.
The idea is to place a large portion of its fleet in Southeast Asia during the northern winter months. SPA sees opportunities to continue rapid growth in Europe during the northern summer season but does not want to continue to invest in fleet expansion unless it can succeed at finding markets to place the additional aircraft during the much leaner winter months.
SPA is one of only a few narrowbody charter operators that is actively shifting its assets across markets depending on the time of the year. Moving aircraft and crews can be costly, particularly when an aircraft has to change registry multiple times every year. But SPA has concluded the revenues that can generated with peak season flying in Southeast Asian markets justify these costs and outweigh the alternative of keeping aircraft and crews idle during the off peak months in Europe.
SPA has looked at various winter markets but is now focusing on opportunities in Southeast Asia, in particular countries that have seen rapid growth in visitor numbers from China.
Why not Lithuania?
It was pointed out earlier that the key market in Europe is Poland. Growth is expected to be strong in Poland and less so in the UK. Meanwhile the objective in both the Italian and Lithuanian markets appears to be hang on and wait for better times. Lithuania currently accounts for only about 20% of SPA's revenues despite being it home market.
Lithuania as a tourist market is an enigma. With a population of only three million, outbound holiday sales are obviously limited, though there is some cross-border activity for outward travel for residents in neighbouring countries.
The real opportunity would seem to be with the development of a demand for travel to Lithuania itself and the potential sale of vacation packages from ‘weekend’ to multi-week fly-drive and other such options that might include other Baltic countries. But so far it isn’t happening.
The most recent statistics available are for 2013. In that year Lithuania received 2.2 million tourists, which was 10.5% more than in 2012. Foreign tourists in 2013 accounted for 1.2 million, up by 9.7% compared to 2012.
Most of the tourism was focused on the capital, Vilnius, which accounted for over 57% of bed nights. The largest number of foreign tourists came from Russia (243,600) and their number grew by 13.7% over 2012. The number of tourists from the European Union (EU) grew by just 3% to 666,400 (54% of all foreigners). The largest proportions were from Germany (148,600), Poland (127,300), Latvia (83,200), and Estonia (42,100).
The total number of bed-nights spent by foreigners in 2013 totalled 2.8 million, which is up by 8.3%. The average length of stay for foreign visitors was 2.3 nights. (Source: Statistics Lithuania).
What to make of this? Incoming tourism is dominated by surrounding countries and, ergo, by those from where per capita expenditure by visitors might not be high. Much of it is likely to be of a VFR nature given Lithuania’s long and at times turbulent history and average length of stay is short. With the exception of Germany there has been no significant breakthrough made in attracting visitors from Western Europe, and in particular from France, the UK, Italy and Spain.
Latvia and Estonia’s tourism product has a head start but Lithuania has uniqueness
It is generally accepted in Lithuania that its Baltic neighbours to the north have a head start with a more modern product in Riga and Tallinn especially, and that they have in place advanced promotional techniques. There is a suggestion of a degree of lethargy in the promotion of the vacation product in Lithuania itself.
There is an air about it of Iceland in the early 1990s, when that country, and in particular its capital, Reykjavik, was on many peoples’ wish list but the tourism authorities were not quite able to deliver the ‘call to action’ that was needed. Since then in Iceland heavy duty promotion, a series of geophysical events (volcanic eruptions) and a financial crash that halved the value of the currency began to attract visitors in droves.
In 2014, there were almost one million foreign visitors to Iceland (+23.6%), which has a population of just 350,000. Ten years previously there were only 360,000 visitors to Iceland. Tourism now accounts for over 25% of GDP there.
And yet in its own way Lithuania offers at least as many attractions as does Iceland, albeit of a completely different nature. It has been shaped by its turbulent history as the largest country in Europe (the 14th Century Grand Duchy of Lithuania), as part of the 16th century Polish-Lithuanian Commonwealth, and under both Russian and Soviet hegemony. Small, green, hilly, relatively inexpensive and accessible, Vilnius, a crossroads of many cultures and the ‘Jerusalem of the North’ with its many contrasting districts, has been a melange of Lithuanian, Polish, Russian Orthodox, German Lutheran, Calvinist and Jewish enclaves, all of which is represented by what is possibly the greatest congregation of churches in one city, anywhere.
This fact is more remarkable in the light of the fact that Lithuania was Europe’s last pagan country. And in the middle of all this religion lies, incongruously, the world’s only statue of the legendary anti-establishmentarian American rock musician, Frank Zappa.
The architecture is unique, a blend of Gothic, Renaissance, Baroque and Neo-Classist styles that has collectively been added to the UNESCO list of World Heritage Sites. The compact downtown, comparatively free of traffic other than at rush hour, contains a picture postcard Old Town, the largest in Eastern Europe. What was a limited and unappetising culinary offer has been vastly improved by the arrival of foreign restaurateurs and by locals rising to meet their challenge. There is even a neighbourhood of Vilnius, Užupis, which declared itself a Republic in Apr-1997, is tolerated as such and remains so today, and is often compared with Montmartre in Paris or Freetown Christiana in Copenhagen.
Outside of Vilnius there are notable sightseeing objects (around 1000 in total across the country) including a Cold War Museum complete with ballistic missile silos. One-third of the country is covered by forests. There are 2,850 lakes, 760 rivers, five national and 30 regional parks, and 26 preserves.
Flying over it, it looks like a more orderly Sweden, without the wholesale logging that takes place there. Moreover, there is a well developed set of beach resorts on the Baltic Sea, centred on and around Klaipeda, the third largest city, the resort town of Palanga, which has the third airport after Vilnius and Kaunas, and the smaller resort of Nida. The climate is attractive only in a short summer season but robust business in-season is supplemented by an established medical tourism segment.
Despite the fact that there are 78 states offering visa-free entry to Lithuania it is evident to the neutral observer that there is a missed opportunity so far in the country, which should be attracting far more foreign visitors. It seems to be searching for a USP to promote itself when in fact there are several robust and timely propositions, right under its nose. But for Small Planet Airlines it is undoubtedly a case of chicken and egg in which greater efforts must be made into attracting visitors first before any of its assets can be deployed to support inbound travel.
Airports and privatisation in Lithuania
There are four international airports in Lithuania, three of them under the same management, and a host of smaller domestic ones, most of which handle only general aviation flights. There is also one leisure-oriented domestic airport which is not currently used that could be developed for scheduled or charter services, at Nida.
The three that are under the same management are Vilnius, Kaunas (the second city with a population of around 300,000) and Palanga (the Baltic Sea resort town). There is also an airport at Šiauliai, the fourth largest city with a population of 134,000, in northern Lithuania but this is used for military purposes.
The three main airports operated independently until Jul-2014 when they were merged into SE Lithuanian Airports (LTOU), headquartered at Vilnius, and under the umbrella of what had been SE Vilnius International Airport. LTOU took over the rights, obligations and contracts of SE Kaunas Airport and SE Palanga Airport.
The raison d’être was that a single airport operator would be better equipped to plan strategically and co-ordinate each airport’s development, and boost commercial revenues.
Vilnius Airport takes on an ambassadorial role for the country
It is the case that air services have increased and that as the ‘first and last impression’ of the country to foreign visitors services and facilities have improved. This is particularly noticeable on departure at Vilnius, an easy to use and modern facility which seems to have adopted a role as ambassador for the country’s technological industries, hosting a semi-permanent exhibition within the terminal.
The management has also been innovative towards the needs of the leisure traveller, for example installing a 50-seat movie theatre in the passenger lounge at Vilnius, showing free of charge short films and documentaries that fit flight schedules. It is believed to be the only such facility in eastern and northern Europe. Some work still needs to be done on Vilnius’ arrival facilities however, which are more typical of a previous era.
Despite a falling population, Vilnius Airport has been growing, at an average rate of +24.6% in the period 2011-2013, though that fell back to +10.5% in 2014.
Vilnius International Airport annual passenger numbers: 2011 to 2014
The average passenger growth rate in 1H2015 (Jan-Jun) was +13.8%. In Aug-2015 332,000 passengers passed through (+10%), a record since it opened in 1932.
The airport now expects to receive over three million passengers in total this year – the threshold of two million having been reached in mid-August. The record numbers have resulted from the increased frequency of flights to and from Vilnius by some airlines and the opening of new routes to Madrid, Saint Petersburg and Odessa. In total, 11 new routes are operating this autumn, including those of airBaltic (mentioned in the first report), Wizz Air, and SAS.
The airport’s overall capacity is estimated at 3.5 million ppa though there is no actual infrastructure expansion under construction or planned considering that figure is well within sight. (The ground handling company Litcargus, plans to construct a 3000sqm warehouse and office building at Vilnius but that is a separate venture).
In order to serve more passengers, Lithuanian Airports therefore requires substantial investments in infrastructure development.
Growth at Kaunas and Palanga has been slower
The two other gateways – Kaunas and Palanga – enjoyed an intensive summer period as well, though not to the same degree as at Vilnius. Building on growth of +4.1% in 2014 (which contrasted sharply with a reduction of 16.2% in the previous year), Kaunas Airport’s passenger growth was +9.3% in 1H2015 although that was decidedly a half year of ‘two halves’ itself, with very strong growth in the first three months followed by a downturn in the second period.
The main focus right now at Kaunas is on the provision of facilities for aviation-related businesses through the implementation of an investment project called AEROHUB KUN (the IATA three letter code for Kaunas), a direct consequence of the creation of Lithuanian Airports. AEROHUB KUN facilitates non-aeronautical revenue-driven projects, and strategic development projects such as an anticipated cluster of airspace-related services and activities. EUR7.2 million has been invested in the first phase, and these initial works have created a new taxiway and apron with the company also in discussions with several potential investors, mainly MRO service providers, with the first agreement to be signed by the end of 2015. The project is being presented and promoted internationally.
The MRO company FL Technics announced on 10-Sep-2015 the completion of a two-year business development project which invested EUR5.8 million into MRO at the company’s MRO centre in Kaunas, creating more than 200 new jobs in the process. FL Technics also has a facility at Vilnius Airport.
Jul-2015 is reported to have also been the most successful period to date for Palanga Airport, a much smaller one that hosted 133,000 passengers in 2014 (+3.9%). But the figures for 1H2015 belie any claim of continuous improvement with growth of just +1.2% characterised by alternate good and bad months.
PPP participants sought; financial results positive
Overall it cannot be denied that the three airports need investment and the next stage beyond the merger is an anticipated concession agreement to seek out PPP participants that are able and willing to fund it. That project is led by Lithuania’s deputy Transport and Communications Minister, Arijandas Sliupas, who was fairly recently Airport Manager at Kaunas Airport. The concession details are not yet known.
The project is initiated at the right moment. Apart from the traffic growth referred to earlier, financial data for the first five months of 2015 show that LTOU revenues increased by 13% compared to the same period in 2014. Net profit increased by 65% and the EBITDA margin rose to 33% (+ two percentage points). And the airports are getting more efficient. During this five month period each employee of Lithuanian Airports handled 2700 passengers, an 11% rise in performance compared to 2014.
Matters became clearer in Jul-2015 when the government announced it was seeking to appoint technical, legal and financial advisers to assist in the development and implementation of Lithuanian Airports’ concession project. A public consultation regarding the advisory services for the concessions project was initiated with a deadline to provide comments and proposals of 10-Aug-2015.
Technical, legal, and financial consultants who have already been involved in financially closed airport PPPs or concessions are regarded as critical to the success of Lithuanian airports concessions project. However, the government has gone out of its way to distant itself from being involved in a ‘privatisation,’ stressing the ‘concession’ nature of the agreement with the clear inference that state assets are not being distributed to the private sector.
The tender to secure international consultants for the procedure was launched on 21-Sep-2015.
One concern that neutral observers have is that sufficient incentives are provided to investors so that they are prepared to invest in systems as well as buildings. There is a lingering suspicion, in part caused by the government’s declaration above, that what it really wants is a management contract where the chance of it losing control over the future direction of these airports is minimised absolutely. But that is not likely to square with the aspirations of experienced operator/investors. There will be much negotiation to come.
Vilnius Airport could close if HSR connection to Kaunas is built
Another inference, and one that will most certainly get the attention of interested operators and investors, was sourced from Minister Sliupas late in Jul-2015 when he said, quite rightly, that (despite there being a need for investment at existing airports) there is no immediate need for new ones in Lithuania. But he then went on to say that in the future, the Vilnius Airport estate could be turned into a residential area, since it is not technically possible to make that airport’s runway longer and the airport “will not be able to meet the needs of the country.”
He added that the Kaunas Airport that he once managed, which has a 3250m x45m runway and is not hindered by curfews or noise or slot restrictions, would be “sufficient” to Lithuania, as long as a ‘speed train’ project from Kaunas to Vilnius is implemented together with any future transfer of flights. Vilnius’ runway is 2515m x 50m.
The distance between Vilnius (downtown) and Kaunas is only 103km (64 miles). It could quite easily be covered by a high-speed train in 30-45 minutes but it would be the equivalent of putting a new airport for London in the English Midlands or asking Frankfurt residents to use Hahn airport rather than Frankfurt International. Local sensibilities on issues like this apart, how would such a suggestion impact on potential investors? Would they not prefer to see the closure of Vilnius Airport first?
The Šiauliai International Airport, or Zokniai Airport, as mentioned earlier carries ICAO and IATA codes and is close to the location of one of Lithuania’s most important tourist sites. Moreover, it is also the closest facility to the Latvian border. But with a military history (it was one of the largest military bases in the Soviet Union) it is still in demand for military purposes as a NATO base following the Russian absorption of Crimea and the Ukraine war heightened tensions in the Baltic region.
A coastal development opportunity
There might be an opportunity in the future to develop the Nida Airport, located on the Curonian Spit between the Curonian Lagoon and the Baltic Sea. It is the westernmost place in Lithuania and the entire Baltic States and borders the Russian Kaliningrad Oblast exclave. This upmarket region is regarded as one of the most attractive in the country and experiences high levels of both indigenous and foreign tourism, up to 300,000 annual visitors in total, though it is restricted by a short ‘season.’
Nida Airport is very close to the town and has a tarmaced runway (since 2006) and could handle aircraft up to the size of a Saab 2000 turboprop on its 815m runway. But other facilities presently are unacceptable to all but helicopter operations. It would require an entrepreneur with great faith in his vision and very deep pockets to invest in it.
It would also require huge investment in accommodation that might be resisted by local government. On the other hand it is easy to see how it could be promoted as a cultured seaside vacation area, internationally. There was an artists’ colony from the late 19th Century and later it attracted the Nobel Prize Winning German Writer Thomas Mann, who noted the resemblance of the Curonian Split to ‘southern countries’ (of Europe) and even to North Africa.
It is exactly the sort of potential resort that might suit an incoming tour operator using the aircraft of Small Planet Airlines in the future.
- Lithuania’s economy is recovering;
- Its population continues to fall, along with the other Baltic States;
- There is no support for another ‘national airline’ unless it is exclusively financed privately
- A successful charter airline has emerged from the remnants of previous scheduled airlines to fill a unique role, but Small Planet Airlines is;
- focusing mainly on other markets and it is not about to tackle the scheduled segment;
- Small Planet in time could fulfill an incoming tourism role, but the nascent tourism product needs refining first;
- Airport investors and operators are welcome to work with the state airports company though they should read the small print carefully.