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airBaltic - Phoenix Award 2010
The most acute problems are on Europe's periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia. Latvia is the new Argentina." Thus wrote Paul Krugman, 2008 Nobel Laureate in economics, in The New York Times in December of that year. The Baltic state's GDP contracted 10.5% in the fourth quarter of 2008, the steepest decline in the EU, and plunged an estimated 18% in 2009. Neighboring Estonia and Lithuania were similarly hard hit.
As the Latvian economy fractured, Riga-based airBaltic faced a double whammy. Its point-to-point short-haul network was extremely vulnerable to the downturn. Furthermore, strategic shareholder SAS Group sold its longstanding stake in the carrier, which was formed as a limited company in 1995. Absent a dramatic change in fortune, airBaltic's longevity might be measured in mere months. But it was quick to react and decided at the first signs of slackening demand to change its operating model from point-to-point out of bases at Riga and Vilnius to a network strategy focusing on one hub.
"We made a virtue out of necessity. As the economy [in the Baltic states] deteriorated and local demand fell, we looked at how we could tap into other markets," President and CEO Bertolt Flick told this magazine (ATW, 8/09, p 33). Showing his commitment, Flick purchased SAS Group's 47% share in the Latvian carrier for LVL14 million ($28 million) in January 2009. The Latvian state holds the balance.
Following through on its plan, airBaltic slashed its operations at VNO in Lithuania from 20 routes in the summer of 2008 to just three a year later. Simultaneously, it developed its network from RIX by increasing frequencies and adding routes. At a time when most network airlines were scaling back, it commenced services to 12 destinations there, boosting its network from the airport to 60 points. The majority of destinations are within a 90-min. flight radius of Riga, which is located strategically on the northeastern edge of Europe, allowing for a north-south as well as an east-west transfer function.
"I always thought that this 'gateway to the east' concept was nonsense, but there is a case here," the German CEO claims. Latvia became independent only in 1991, and passengers originating in Russia and the CIS feel comfortable changing flights in Riga on their way to Western Europe. There is also strong ethnic traffic.
Transfer is now the backbone of its operations, with 60% of passengers changing planes at Riga. Despite the near-collapse of demand in the Baltic market, it achieved 33% passenger growth at its home airport in the first nine months of 2009 versus the year-ago period. This compares strongly to a decrease of about 20% for all other carriers at the airport. Its overall passenger numbers rose 5% in the same period, to 2.1 million. For the full year, total passenger boardings rose 6% to 2.8 million passengers.
The gains did not come from adding capacity: It operated 4% fewer flights in 2009. But load factor jumped 6 percentage points. Moreover, it lowered its unit costs while unit revenue improved by some 10%. Punctuality was up by about 6 points to 94% in September. At year end its fleet comprised 11 F50s, 18 737s and two 757s. It will add new Q400s this year to replace three 737s.
Although airBaltic could not disclose financial results publicly, it confirmed to ATW that revenue rose almost 2% in the first nine months of 2009, EBITDAR more than quadrupled and it had a pre-tax profit, reversed from a loss a year earlier. It expected a full year pre-tax profit of LVL14 million ($28.3 million).
The carrier's change to its business model, completed in just two schedule seasons, has been validated by the healthy gains in operating and financial results during the downturn. Although it is still in the early stages of its journey and challenges remain, the editors of ATW are confident that its strong leadership and forward thinking position it well for the coming recovery. It is a highly deserving winner of the 2010 Phoenix Award, which is intended to recognize an airline that has achieved a commercial rebirth through a life-changing business transformation.