Latvia's airBaltic gets a EUR 132 million capital injection, promises not to buy Sukhoi planes.

Latvia’s national carrier, AS Air Baltic Corporation (airBaltic) was a loss-making disaster in 2011, a mare’s nest of entangled and shady entities left behind by its slick, Latvian-speaking German CEO and part owner Berthold Flick.

Today, having witnessed the demise in recent years and weeks of ambitious airlines in neighboring Estonia and Lithuania, airBaltic is profitable and has gotten the green light for a EUR 132 million recapitalization from public and private funds that will erase the negative equity the company has suffered in recent years. The recapitalization will make it possible for the airline to finance new aircraft purchases on significantly better terms.

The final draft of the shareholders’ agreement explicitly forbids the airline from buying or leasing aircraft from “military-industrial” companies that are subject to sanctions from the European Union (EU). The clause, inserted at the insistence of the Latvian government, is designed to quash speculation that the Latvian national carrier could buy Russian-built Sukhoi Superjet airliners. Sukhoi mainly makes combat aircraft.

In a move echoing pressure from the government — airBaltic’s 99.8% owner — and perhaps some clever public relations, CEO Martin Gauss also shot down rumors that it would be using its renewed financial strength to buy Sukhoi Superjet airliners for its regional airliner fleet.

airBaltic CEO Martin Gauss

Photo: airBaltic media archive

Instead, airBaltic moved closer to a possible deal with Canada’ s Bombardier for its CS100 regional aircraft, one of which was flown specially to the Latvian capital, Riga, and presented to local media. airBaltic already has several Bombardier CS300 planes on order for delivery in September, 2016. Mr. Gauss indicated that his earlier statements that Sukhoi had a viable offer may have brought Bombardier to Riga to talk about matching or bettering any deal from the Russians.

Rumors that Sukhoi aircraft could be a possible choice arose when it was announced that the private investor — getting 20% of airBaltic for EUR 52 million, was Ralf Dieter Montag Girmes, a wealthy German businessman who had done consulting work in Russia and was also involved in aircraft leasing, necessitating contacts with Sukhoi and other commercial aircraft makers.

The thought that Latvia — which feels threatened by Russia since the annexation of Crimea in 2014 — would be buying little-proven Russian airliners created the greatest public uproar surrounding efforts to recapitalize the national carrier. Fears of Sukhoi Superjets flying in Latvian and European skies eclipsed the fact that ahead of a tight budget year 2016 , the government was borrowing EUR 80 million from the state treasury to risk investing in airBaltic until a suitable “strategic investor” will be found later to buy out the state and Mr. Girmes.

Photo: airBaltic media archive

The Latvian media, shorter on fact-checking than on suspicion bordering on paranoia, immediately speculated that Mr. Girmes was investing with the purchase of five Superjets as a condition of the deal. Indeed, the multi-faceted businessman with interests in hotels and horse-breeding farms, said to have even bought a British lordship, was given a say in airBaltic’s fleet purchases in an earlier version of the shareholder agreement.

The apparent exclusion of Sukhoi from the final agreement (though it could be argued that the civilian aircraft business of the Russian company isn’t sanctioned) should have calmed the critics, but issues remained. The initial approval of the recapitalization deal after a government meeting late into the night on November 3 resulted in the baffling dismissal of Latvia’s Minister of Transport, Anrijs Matīss, who presented the deal in the first place. Shouldn’t the deal have been rejected if its advocate, Mr. Matīss, was deserving of dismissal by Prime Minister Laimdota Straujuma?

To be sure, Mr. Matīss expressed doubts about the deal, essentially saying it was the least worst option. In September, he fired Prudentia, a Latvian investment banking and financial advisory company hired to find investors for airBaltic. He said that Prudentia had violated confidentiality agreements and leaked information to media about the forthcoming deal.

Mr. Matīss, a member of Ms. Straujuma’s Unity party — one of three parties making up Latvia’s coalition government — has not been replaced, something that is seen as a sign that a government reshuffle may be in the cards. The airBaltic recapitalization, dragged out over more than a month since the government first approved it only to kick the final decision down the road, was seen as a symptom of rifts within the coalition.

The right of center National Alliance insisted that there be no deal unless the possibility of airBaltic using Sukhoi aircraft was excluded, while Ms. Straujuma’s other partner, the Greens/Farmers’ Alliance, objected to the government injecting EUR 80 million into the airline, saying it would impact the 2016 budget. In a compromise, the government’s part of the recapitalization, technically a temporary investment and not “spending”, was subject to a seperate vote days after the budget was approved by the parliament, or Saeima, on November 30.

The government has also ordered an independent audit of airBaltic’s business since it was nationalized in 2011, bringing in Mr.Gauss as CEO, as well as auditing the process of searching for new investors. This could be seen as a signal that, while it trusts the current airBaltic CEO, the government also wants to verify what he has done. A few sources claim that some murky practices from “the old days” under Mr. Flick (who has since retreated to Germany) persist, but Mr. Gauss points to shelves full of ring binders in his office at Riga Airport, saying that every decision by the airline’s management is above board and well documented.

The audit may dispel rumors and conspiracy theories that, now that it is being recapitalized, airBaltic will face new claims from hitherto hidden creditors. The airline says that it has settled all claims against it arising from when it was under previous ownership.

Air Baltic currently operates 25 aircraft — 5 Boeing 737–500s, 8 Boeing 737–300 and 12 Bombardier Q400 NextGen — and flies to more than 50 destinations in Europe and the Middle East.

Founded in 1995 and nationalized in 2011 because of mounting losses, airBaltic posted a net profit of EUR 10.6 million last year on revenue of EUR 254 million.