ReShape results will spur Air Baltic investors: Gauss

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Demonstrable success under the ReShape restructuring plan will be the driving force behind Air Baltic's search for a strategic partner, chief executive Martin Gauss tells Flightglobal, with management looking to make the case for investment through quantifiable results.

Insisting that talks with prospective Gulf and Chinese partners remain at the early stages and may not require due-diligence for "a while", Gauss candidly adds: "I don't expect a quick win on this one, but you never know."

Advertisements in the UK press this month invited expressions of interest for 50% of the flag carrier minus one share. Latvia's government has been searching for a new co-owner since last year's divestment of a 47.2% stake by Baltic Aviation Systems, the offshore investment vehicle headed by former chief executive Bertolt Flick. That break-up left the State with virtually the entire share capital of the airline.

Mindful of EU scrutiny, Gauss says: "A private investor as early as possible is better, and the government would be happy. We don't exclude anybody coming now. But my personal opinion is that it is much easier when you can prove that your business model works."

To that end the airline's restructuring plan, dubbed ReShape, has produced a roadmap for dramatically scaling back last year's loss of about 80 million lats ($130 million at the time). The programme initially targeted a loss of 38 million lats this year, 16 million lats in 2013, and profitability in 2014. But it is already outperforming, Gauss says, with Air Baltic currently 5 million lats ahead of schedule for 2012.

"Our RASK and CASK ratio were the wrong way round [before ReShape], and the forecasted losses for the future would have been even higher than the record loss in 2011," he recalls. "So we had to do something to stop it."

Air Baltic's response came in the form of sharp capacity reductions; rationalised staffing costs; and the signing of a letter-of-intent for 10 Bombardier CSeries jets, paving the way for a two-type fleet alongside its Dash 8 Q400s. The hybrid business model - combining ancillary revenue generation with premium cabins and a primary-airport network - remains central to its strategy.

ReShape also pays heed to the rising threat posed by low-cost carriers (LCCs), charting an expansion trajectory for Air Baltic which pragmatically cedes parallel growth to the likes of Ryanair.

"Today the average capacity share for low-cost carriers in Europe is 29%," Gauss notes. In Latvia, however, the figure is lower, meaning that LCCs stand to benefit the most from the 7% annual growth IATA forecasts for the region. "If Riga reaches average [LCC penetration] it will mean the low-cost carriers grow their share by 38% ... Air Baltic only expects to grow by a maximum of 4% in 2016. So we will reduce our market share in Riga."

"We have to assume the low-cost carriers will become stronger," Gauss emphasises. "I will always copy something successful done by the leading low-cost airlines, but I can't stop serving Brussels, for example."

Notwithstanding the challenges, the chief executive has a track-record for successfully restructuring carriers. His turnaround plan at DBA saw the former British Airways subsidiary post its first ever profit in 2005 - ending a 12-year run of losses, and ultimately making the case for Air Berlin to take over the carrier. It is no accident, Gauss says, that Air Baltic's lime green livery bears such a striking resemblance to DBA's.

"I know it can happen," he says of finding an investor. "But I also know when is the right time to ask. Now we are in the phase where we show clearly what we can do, and we show month-by-month the performance of the plan."

July's report confirmed that Air Baltic is slowly moving into the black, posting a net profit of 1.4 million lats. Gauss is quietly confident of the same in August and September, though he accepts that the winter season will be more difficult. With every month that the strategy holds water, he says prospective partners in the Gulf, Asia and elsewhere will sit up and take note.

Confirming that he accompanied the Latvian prime minister on trips to the UAE, Qatar and China this year, Gauss adds: "We talked to all three airlines [Etihad, Emirates and Qatar Airways] in early spring ... I also had some discussions in China this month. We were able to show them what we want to do, and the future will show what happens."