精东影业

How the Airbus A220 propelled airBaltic into a league of its own

Martin Gauss, the President and CEO of airBaltic, shares the secret to the airBaltic experience
精东影业

For the latest edition of Executive Spotlight, 精东影业 spoke to Martin Gauss, the President and Chief Executive Officer (CEO) of airBaltic. Having been the man at the helm of the Latvian flag carrier for nearly 12 years, Gauss has led the airline through some turbulent times, made decisions with a long-lasting impact, and perhaps most importantly, returned airBaltic to profitability.

One of those impactful decisions was for the airline to become a single-fleet operator, with airBaltic finalizing the order for the then-Bombardier CSeries CS300 as far back as December 2012. Throughout the years, the airline has continued to expand its order book, with its fleet of Airbus A220s, as they are now known, set to grow by up to 50 aircraft, and the potential to double in size within the decade.

Now, having taken delivery of its 43rd and 44th Airbus A220 on September 2 and September 9, 2023, respectively, the Latvian airline is at a crossroads: how many more aircraft should it operate in the coming years?

You can watch the full conversation with Martin Gauss, President and CEO of airBaltic, here:

Important profit timing

airBaltic精东影业 return to profitability in H1 2023 has come at an important time for the airline.

Gauss described the airline精东影业 performance in the first half of the year as 鈥渞ecord-breaking 鈥 in 27 years [of the airline], we did not have such a net result.鈥 Revenues have not been as large as during the same period, and most importantly, this was achieved after the pandemic and while the war in Ukraine is still raging on.

鈥淎nd that makes it special,鈥 the CEO noted. 鈥淚f we look at our [earnings before interest, taxes, depreciation, and amortization (EBITDA)] margin, we are at the top in Europe now also.鈥

Most importantly, the H1 2023 net profit of 鈧14.6 million ($15.6 million) has come just as the airline gears up to list publicly via an Initial Public Offering (IPO) in 2024.

鈥淪o, we are forecasting this kind of performance and we are delivering, and that is the most important [part] of how we read the result,鈥 Gauss continued, adding that he was happy with the outcome.

Still, the airline精东影业 first six months of the year were not all rosy. With the war in Ukraine still ongoing, forcing the carrier to readjust its network, airBaltic also had to wet lease-in aircraft to cover for the delays in getting back its Pratt & Whitney PW1500G engines, exclusively powering the Airbus A220, from maintenance facilities.

At the peak, 13 of airBaltic精东影业 aircraft were grounded, whereas during Q2 2023, the figure stood at 12. Though the number has been decreasing recently, Gauss mentioned that the main problem was that the airline had those engines in its hangars, but 鈥渢hey did not have the spots to go to the [Maintenance and Repair Organizations (MRO)] where they would have been maintained鈥.

At the time of the interview in August 2023, the number of grounded airBaltic Airbus A220s was seven.

Affecting airBaltic精东影业 passenger experience

Though the number of grounded jets is continually going down, it has negatively impacted airBaltic精东影业 peak season, not least the experience of passengers.

Initially, airBaltic planned to have only four aircraft grounded, but when the situation changed, the airline had a larger number of aircraft wet leased in on an ad-hoc basis. In the short term, it proved 鈥渧ery expensive鈥 to take them in, Gauss explained.

鈥淲e could not afford to cancel flights, we had very good forward bookings. And especially here from the Baltics, there are very limited alternative offers,鈥 the CEO continued. 鈥淪o, if we would have canceled the flights, the passengers would not have had their holidays, therefore, we decided to take in other airlines鈥 [aircraft], which was very painful.鈥

Gauss explained that this was because passengers had bought tickets for the most modern aircraft, namely the Airbus A220, but instead, flew on a wet leased-in aircraft, 鈥渨hich is never the same quality,鈥 and therefore airBaltic 鈥渃annot deliver the same service鈥.

鈥淥perationally, that is also an issue, because an airline that is flying temporarily for you does not normally deliver the same consistent operation,鈥 he added, noting that despite all of these issues, airBaltic successfully delivered positive results.

Gauss said that the airline and Pratt & Whitney are in 鈥渃onstant discussions鈥 over the engine issues, having discussed the commercial agreement in 2022 and again in 2023. 鈥淲e expect the situation to go well into 2024,鈥 Gauss said, adding that it might not be resolved until the end of next year.

But how did airBaltic manage to achieve its positive results, despite these factors?

鈥淚f we analyze what led to the success, it is a combination of selling the right amount of tickets at the right price, but also having a unified fleet with efficiency because we need to see that the aircraft is completely different compared to other aircraft in this category,鈥 Gauss said.

The Airbus A220 not only has a fuel cost advantage but is also cheaper to maintain and can still connect two distant cities, such as Vilnius, Lithuania, and Riga, Latvia, with Dubai, the United Arab Emirates (UAE). 鈥淲e could also fly to Tallinn,鈥 Gauss noted.

Passengers also seem happy, with the CEO mentioning that, when the carrier wet leases out its A220s, passengers on the airlines in question have been positive about their experience of the type.

Wet leasing aircraft has become an important part of airBaltic精东影业 business, with Gauss saying that the airline has wet leased 14 aircraft to others in Europe. This revenue stream developed after the pandemic hit, with airBaltic not delaying any Airbus A220 deliveries.

鈥淲e found a way to place the aircraft while the Russian, Ukrainian and Belarussian air space was closed,鈥 Gauss continued, adding that while at first, the airline thought it would be a temporary revenue stream, but that it has now became a crucial part of airBaltic精东影业 business, with the company only expanding its wet lease services.

鈥淲hat we are offering is very different to a normal wet lease operation,鈥 Gauss said. According to the executive, the main advantage that airBaltic has, coupled with the airline精东影业 cabin crew members delivering a premium service in business and economy, is that the 150-seat A220-300 offers something that is not available in Europe.

鈥淭he demand for our product in wet lease is very high,鈥 Gauss observed. Yet the airline will limit the number of aircraft it will dedicate to wet leasing, as the backbone of airBaltic精东影业 business model is 鈥渢he connectivity of the Baltics and beyond鈥.

Expanding beyond the Baltics

These intentions can be traced in airBaltic精东影业 route map, with the airline opening bases in Tampere, Finland (opened in May 2022), and Gran Canaria, Spain (first flights in December 2023).

airBaltic精东影业 passengers will be able to travel to Gran Canaria Airport (LPA) from several points in the Baltics, Scandinavia, as well as the Tampere, Finland base. The airline will station two Airbus A220s there, which is a 鈥渟easonal basing of two aircraft,鈥 Gauss explained. As such, airBaltic is looking to open up new markets with regular flights.

However, Gauss does not see this as a year-round base, because of the capacity limitations associated with the Airbus A220. 鈥淟arger equipment is much better suited for that kind of operation [in the summer],鈥 Gauss said. Nevertheless, the 150-seater aircraft has provided airBaltic with an opportunity, particularly in the Nordic countries of Norway and Denmark, where the airline already sees 鈥減romising numbers鈥 in pre-bookings.

鈥淚 think we will see more of these things in the future,鈥 Gauss said, but once again he emphasized that the backbone of the airline精东影业 business is expanding within the Baltics and Scandinavia.

As for competition on flights from LPA during the winter, 鈥渢he 150-seaters are easier to fill than [competing airlines鈥橾 180-seaters or 200-seaters鈥. The single-fleet type, composed of the Airbus A220, offers a cost advantage too, which results in 鈥済ood ticket prices鈥. What精东影业 more, airBaltic精东影业 cabin configuration with a business class and an economy class means that the airline can offer a dual service with 鈥渁 different passenger mix and different yield鈥.

What about flights to the United States (US)? After all, the Federal Aviation Administration (FAA) bumped Latvia精东影业 status to Category 1, allowing the country精东影业 airlines to operate direct flights to the US.

Gauss replied that airBaltic has a codeshare with Delta Air Lines, which has gone into effect, with the US carrier 鈥渟erving 35 points in Europe from where the codeshare goes then to the Baltic States鈥.

鈥淎 US carrier coming direct to Riga would make a lot of sense for the Baltic States, we could fill an aircraft just with our fleet today,鈥 the executive noted. But according to Gauss, the US-based airlines to which airBaltic has spoken always compare the economics of flying to Riga Airport (RIX) with putting more frequencies to larger airports within Europe.

鈥淏ut it is a matter of time for us, as we could also serve the US directly but that does not fit our current business model,鈥 Gauss noted. He added that, if in the future there is an aircraft that could connect the Baltic States with the US like the Airbus A321XLR, airBaltic could theoretically do so, but it would break the 鈥渟implicity鈥 of the business model, which is why the Latvian airline is 鈥渘ot focusing on it鈥.

In terms of performance of the base in Tampere鈥揚irkkala Airport (TMP), it was 鈥渙kay鈥 during the first summer in 2022, followed up by a winter that was 鈥渘ot okay,鈥 according to Gauss. 鈥淭his summer, [the base performed] very well and we are looking into the winter and how it is developing.鈥

But the airline is also analyzing what works and what does not, with its primary goal at TMP being to offer connectivity with the major hubs in Europe. 鈥淭hat is our unique model and therefore [at] Tampere, a business city with a catchment area of one million people, there is a lot of demand for connectivity,鈥 Gauss said.

However, Gauss argued that the 鈥渂read and butter鈥 in Europe today is leisure traffic, so 鈥測ou have to offer both鈥, which is why the airline is still adjusting summer and winter schedules accordingly.

Currently, airBaltic has one Airbus A220-300 based there, with an option to add another if demand justifies it.

Airbus A220 versus Airbus A319/A320neo versus Boeing 737 MAX 7

But while the Airbus A220 has now become a game changer for airBaltic, despite the current engine issues it is facing, it was not always the airline精东影业 first choice.

Gauss explained that the decision had already been made to renew the jet-engine fleet, with only Airbus offering the A320s to airBaltic. However, when the executive arrived in Riga, Latvia, he reopened the tender process, also inviting Boeing and later on, Bombardier.

鈥淲e then had, in the final round, the A319neo, the 737 7 MAX, and the [CSeries] CS300,鈥 Gauss stated, with all three aircraft manufacturers presenting their final offers. Bombardier went first, and neither of the two could match what the CSeries had offered.

鈥淭he comparison between the three aircraft showed that the performance of the CS300 was better than the performance of the other two,鈥 Gauss explained, adding that none of the aircraft were yet flying at that time. 鈥淭he other two can鈥檛 compete with [the A220] because it is lighter. Mainly it is lighter with the same engine technology, so it is performing better,鈥 the CEO said.

The decision was made 鈥減urely based on economics in combination with the price, and we took the right decision鈥, with airBaltic later becoming the launch operator of the CSeries CS300. At the time, the airline精东影业 leadership did not know that they would become an all-Airbus A220 operator, a decision that was eventually made at the time of the COVID-19 pandemic.

According to Gauss, they made this decision to accelerate the retirement of the De Havilland Canada Dash 8 Q400 turboprops, which were grounded for two years during the pandemic. 鈥2023 was the first year when we would have flown only with the Airbus A220,鈥 Gauss remarked, adding that the engine problem threw a spanner in the works.

鈥淥nce we are out of wet leasing-in, we will see the full effect of the A220 single fleet operation and that is very powerful,鈥 the executive said, adding that the effect will be 鈥渟o powerful that we [will] play in our own league鈥.

鈥淚f you analyze us and all the details, then you come to the conclusion that we have a unique positioning because of that single fleet operation [with] an aircraft with 150 seats,鈥 Gauss explained.

And as for the decision to become an all-Airbus A220 operator?

鈥淧urely the performance,鈥 Gauss replied, noting that even today, passengers tell the airline through various channels about the positively different experience on the A220. 鈥淥ur seat pitch is significantly larger than on traditional low-cost carriers.鈥

鈥淭he aircraft performance, the fuel burn, the CO2 emissions, the noise, all of that on that aircraft, in combination with the range that it offers, is unique,鈥 Gauss said. 鈥淏eing able to only have to fill 150 seats gives us an advantage to fly on smaller routes against competition.鈥 Indeed, this was very successful when airBaltic began operating the A220s.

Growing the fleet to 100 aircraft?

airBaltic精东影业 current order book stands at 50 Airbus A220s, 44 of which have already been delivered by Airbus. However, the airline is currently discussing future options for its fleet.

鈥淲e are discussing with Airbus [the possibility to] exercise the 30 options and add 20 options. We have developed a business plan until 2030 where we have two scenarios: one is 80 aircraft [and] one was 100 aircraft,鈥 Gauss explained. Both scenarios will be used for the upcoming IPO, showcasing the airline精东影业 planned growth with the planned fleet expansion.

There are two factors in play for the airline. One is the demand for wet lease services, where there is a dedicated number of aircraft to lease to other carriers. The other is how well airBaltic can expand over the course of the next few years.

鈥淚t is a seven-year horizon,鈥 Gauss noted, adding that, within in that timeframe, 鈥渨e all know a lot of things can happen鈥.

During the same timeframe, it could be that Airbus will release a stretched A220, rumored to become the A220-500. In a separate statement to 精东影业 in May 2023, an Airbus spokesperson said that the stretch is a 鈥渕atter of when and not if, though we are not able to give a timeline鈥, adding that the current priority is to ramp up the current production rates of the A220-100 and A220-300.

Nevertheless, for airBaltic the ideal stretch variant would be simple: same range but more capacity. 鈥淚t is a bit difficult because that means you need to change the engine as well as the wing, but we would go for a stretched version,鈥 Gauss said. According to the executive, such a stretch would provide airBaltic with the ability to utilize routes during the peak summer season, including flights to Dubai, 鈥渨here you can sell more seats and then you would have an economic advantage鈥.

Looking forward, Gauss warned that the airline can already see that it will be short of aircraft next summer and is currently discussing whether to wet lease-in aircraft or reduce its Summer 2024 flying program.

If Airbus were to introduce another engine type to the A220 family with the stretch, airBaltic would take a pragmatic approach and 鈥渨ould look at the economics鈥.

鈥淲e are not married to one engine manufacturer,鈥 Gauss commented.

Ever-changing and consolidating market

Over the years, not least since Gauss has been in charge of airBaltic, several airlines have failed, even within the Baltic states. Meanwhile, the European airline market has become more and more consolidated.

鈥淚 think we will see more consolidation because, at the end of the day, we are following the US market,鈥 Gauss explained, adding that the current landscape of airlines within Europe will shrink. 鈥淭here will still be more than people think, it will not just be five big airlines, but consolidation will continue.鈥

Looking at airBaltic specifically, Gauss mentioned that it currently stands on its own. 鈥淚f we do the IPO, then we will grow on our own but that does not mean that we will not be a part of a larger group one day,鈥 he added. He also noted that many competitors around the Baltic Sea, including Finnair, Norwegian, Estonia精东影业 Nordica, and SAS, are having to adapt to a new reality in one form or another.

鈥淲e have many airlines in Europe that were doing a good job, especially this year鈥, but where there is potential to merge, they will merge together. Gauss suggested that the large groups will either grow on their own and outgrow the competition, or they might acquire the smaller airlines, adding that 鈥渂ut then, you never know what is going to happen next year鈥.

In terms of the Baltic States market, 鈥渢here is room for growth,鈥 according to Gauss. While at RIX the airline is restricted by the airport and its infrastructure, including the lack of working jet bridges, the major growth push could come from Vilnius Airport (VNO) and Kaunas Airport (KUN). 鈥淭here, the strategy is different, with the Lithuanian airports [VNO and KUN] being focused on low-cost carrier flights rather than connectivity,鈥 Gauss explained.

鈥淟ooking at the three Baltic States, all of them can still grow,鈥 he said.

Gauss has viewed the growth from the inside, too, arriving in Latvia in November 2011. Latvia 鈥渉as changed more towards Europe,鈥 according to Gauss, mentioning the fact that there has been a lot of innovation in the three Baltic States. 鈥淭hey are now seen as serious European countries [and they] are playing an important role,鈥 he continued, adding that with the war in Ukraine, the Baltic States鈥 leadership has showcased an impressive level of maturity.

鈥淚 have to say, working here [while] coming from Germany, I am proud of the development of the Baltic States,鈥 Gauss said. However, one thing that the executive would like is more inbound tourism, as there is seemingly a lack of advertising throughout Europe. 鈥淭hat is something where I think the three Baltic States can still improve.鈥

For the airline market within the three states, many airlines have disappeared around airBaltic. 鈥淲e are here [and] we are strong,鈥 the CEO said.

Innovative spirit at airBaltic

鈥淭hat is also because we take an innovative [approach], the spirit of the company is very innovative. I think we are one of the innovation leaders, depending on how you define innovation,鈥 Gauss continued. By way of example he mentioned the introduction of Bitcoin as a form of payment in 2014, as well as the development of the non-fungible token (NFT) collection.

The NFT collection even helps airBaltic to make money, but on top of that, it is also a loyalty program, which is 鈥渦pgraded to a level which [was not seen] in the world yet,鈥 Gauss added.

So, what about the long-term future?

鈥淭he ultimate game for us, as airlines, needs to be in the long-term future,鈥 the executive noted, adding that airBaltic is looking toward the next technology that will reduce the use of fossil fuels. 鈥淐an we fly with something which does not burn fuel?鈥 he asked rhetorically.

鈥淏ut we will not be jumping on any trend because there is just no jet today which can be powered without sustainable aviation fuel [SAF] or fossil fuels,鈥 Gauss continued, adding that this change is not likely to happen within the next five years. At the same time, it is vital to be open to innovation, because the technology which might prove to be the solution, 鈥渂e it hydrogen or whatever鈥, needs to be supported, which is why the innovative spirit within a company can make it more accepting of a new technology.

Lastly, 精东影业 asked Gauss a hypothetical question: What if a billionaire approached him and told him that they would fund any aircraft purchase for airBaltic: which aircraft would it be?

鈥淲e would buy more A220s,鈥 airBaltic精东影业 CEO answered.

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