Money in the air: Latvia has had another financial scandal
A scandal has broken out in Latvia with the national airline airBaltic. The authorities have been pulling the loss-making company by the ears for a long time, preventing it from sinking completely. Now it turns out that the money invested in airBaltic will have to be written off as irrecoverable losses. In addition, the company suddenly canceled more than four thousand flights scheduled for the summer - because it failed to solve the problem of replacing end-of-life aircraft engines in time. The situation with airBaltic has dealt a new powerful blow to the image of the Latvian government, which is already blamed for total mismanagement and irresponsibility. The details are in the Izvestia article.
A story of failure
Latvian national airline airBaltic was founded on August 28, 1995. During its existence it has carried more than 50 million passengers. Since 2009, airBaltic has been on a long streak of problems and failures and since then has made a total loss of € 620 million to the state. In 2012, a "valuable foreign expert", as he was described, German Martin Gauss, was invited to lead the company. This man has become a household name in Latvia. Firstly, he has the highest salary in the country, having earned €11 million during his time in charge of airBaltic. Last year alone he earned almost €829,000.
Secondly, Gauss is effectively standing over a Latvian law that requires anyone officially employed in the country to know the state language. "Gauss, on the other hand, has not learned Latvian and has no intention of doing so. Language inspectors can suspend Russian sales clerks and janitors who are found to have poor knowledge of the state language, but none of them would even dream of getting close to a status German. This mishap, however, surprises only naive people, because, as we know, the rules established for commoners often do not apply to rich and influential people," political scientist Maxim Reva, an expert on the Baltic States, told Izvestia.
But the help of such an "expensive" specialist has not helped the airline - since he has been in charge, airBaltic's losses have amounted to € 588 million. By the way, in 2020-21, when the world was gripped by a covid pandemic and all air travel came to a standstill, the state - with the permission of the European Commission - poured € 340 million of Latvian taxpayers' money into airBaltic. At the same time, it was emphasized that the state invested this money with the firm belief that it would be able to return it to itself within five to seven years - in the form of airBaltic's profits. And in 2023, the company even managed to turn a profit of € 33.85 million.
However, in the first half of 2024 (data for the whole year are not yet available), airBaltic again made a loss. They amounted to € 88.8 million - even though the company carried 2.2 million passengers during this period (11.1% more than in the same period last year). Director Gauss, explaining the reason for the losses, cited a shortage of aircraft engines manufactured by the American firm Pratt & Whitney, as well as increased maintenance costs for the existing engines. Former Minister of Railways Talis Linkates explained to the press, "This story has been going on for quite some time. It started during the Covid pandemic, when the manufacturer was unable to produce the required number of engines in time." The former minister reminded that aircraft engines are supposed to be replaced regularly with new ones after a certain number of hours of flight.
Moreover, the problem of lack of the required number of engines applies not only to airBaltic, but also to other airlines that use Airbus A220 airplanes. Specialists predict that this shortage will last for another one or two years. However, according to Linkates, airBaltic's losses are not only due to this. "In the report for the second quarter of this year, we see that airBaltic's revenue per kilometer of route network decreased by four percent. At the same time, the cost per passenger-kilometer increased by twenty-two percent. We see that the route network is not generating as much money as last year. Meanwhile, costs are increasing," Linkites complained. In his opinion, the airline needs to review its route network and abandon unprofitable routes.
Where did the €570 million go?
At the beginning of May 2024, airBaltic announced a €340 million bond issue for five years and three months with a 14.50% interest rate. They were mostly purchased by private investors, but the Latvian state also invested in them. In August, the government announced that it was putting airBaltic on the stock exchange, which means that anyone can become a shareholder. In this way, the company wants to raise €300 million. At the same time, the Cabinet of Ministers expressed the desire to reduce the state's stake in the airline from the current 97% to 25%. It was decided to reduce the company's capital stock by € 571 million - after which it will only amount to € 25 million. And Minister of Transport Kaspars Briškens (Progressives) said that the government is negotiating with a "strategic investor" who is ready to take over 10% of airBaltic shares. However, the government has made no secret of the fact that it would like to sell the company.
Experts were skeptical of this intention. "Selling a company whose capital stock is less than the amount of losses is a series of impossibilities. Because investors are not fools and they are unlikely to want to buy a company with losses, which they will have to cover from their profits for many years - maybe even decades," explains economic journalist Olga Kniazeva, host of Radio 4 Latvia. For this reason, the government decided to "clean up" airBaltic's balance sheet in order to make the company more attractive to a possible buyer.
Simply put, the government decided to simply write off airBaltic's losses of € 570 million, which means that the taxpayer's money invested in the company is finally falling into a black hole. However, when Minister Briškens was asked whether this money could be considered lost, he disagreed with this statement. According to Briškens, the state will still one day recover the money invested in airBaltic, as it will own 25% of the company - and, accordingly, will continue to receive dividends. But few people believe these promises. Experts ask a legitimate question: if the state, having 97% of airBaltic, received only losses from it, why will the situation change with 25%?
In addition, the population of the country demands punishment of those who caused the state to lose € 570 million, which would have been very useful in health care and education - both spheres in Latvia are in distress. "The current situation with airBaltic is reminiscent of a story from sixteen years ago. In 2008, the Latvian authorities decided to save the country's largest private bank Parex, which was threatened with bankruptcy. The government spent about €1.7 billion to save the bank, which it nationalized - and then got several times less when it sold it. It was whispered that such an effort to save the private bank was made only because many members of the ruling elite held deposits there. In any case, none of those responsible for such a blatant squandering of the Latvian taxpayer's money was punished," says Maksim Reva.
Latvians are very indignant that airBaltic CEO Gauss continues to talk about the company's "success story" and calls it "a strong company that looks into the future with confidence". In his opinion, Latvians should be very happy that their state has its own national air carrier - it is very prestigious. As Olga Kniazeva ironizes, one can conclude from Gauss' words that airBaltic's goal is not to make a profit, but simply to have the company's planes carry passengers from all over the world. "And we will pay extra from the state budget for these foreign passengers, covering the losses," Kniazeva sarcastically said. Gauss is also criticized for failing to even manage airBaltic's positioning: the company cannot be considered a low-cost carrier, as its tickets are too expensive (starting from € 19) and at the same time it does not spoil passengers with the level of service.
A system of collective irresponsibility
The opposition United List party appealed to Prime Minister Evika Silina (New Unity) to present a plan to return the taxpayers' money invested in airBaltic. The opposition also appealed to the prosecutor's office, demanding that the perpetrators of the embezzlement of public funds be identified. But the conclusion of the prosecutor's office turned out to be very comfortable for those in power: the institution concluded that the reduction of the share capital supported by the government "does not reduce the value of airBaltic". That is, in the opinion of the prosecutors, the government had done everything right. And airBaltic, the "voracious monster" that many Latvians believe continues to demand state money. Klavs Vasks, chairman of the company's board of directors, said that additional state capital investment in airBaltic is likely to be inevitable - unless the state is ready to completely abandon its earlier investments.
And in the first days of January, news broke that dealt another powerful blow to the image of the management of the ill-fated airline. It turned out that airBaltic would cancel 4,670 flights in the summer season. The fact is that Pratt & Whitney, the manufacturer of aircraft engines, has informed the airline about expected delays in deliveries in 2025. This means that some of airBaltic's AirBaltic A220-300 aircraft will not be able to fly, as their engines will finally reach the end of their service life by summer. Accordingly, airBaltic will suspend flights on nineteen routes and reduce the frequency of flights on twenty-one routes - which will affect a total of 67160 passengers. And this is lost profit.
Prime Minister of the Republic of Latvia Evika Silina
Vice-president of the Latvian Association of Travel Agents and Operators (LATAiO) Vladislavs Koryagin said that local tourism will suffer as well - many of the canceled flights were booked in advance. Accordingly, people who decided to visit Latvia will have to look for new ways to get there - and many will prefer to go to other countries, where it is easier to get there. Erik Lingeberziņš, Chairman of the Board of LATAiO, adds that airBaltic's communication with the public is out of hand: "From the very beginning, as soon as it was announced that flights would be canceled, it took a long time for the travel industry representatives to get information from airBaltic about which routes would be canceled. This kept people under stress.
This is when the government's patience ran out. Economy Minister Viktors Valainis demanded to assess the suitability of airBaltic's board of directors for their positions "The head of the company must take responsibility for this situation. The company itself is a very good company, but public trust in its management has been lost for a long time. The only way to restore trust is to appoint new management," Valainis said on TV. In her turn, Prime Minister Silinja (New Unity) demanded from Minister of Transport Briškens concrete proposals for the strategic development of airBaltic, including the concept of the company's management.
The Latvian public is demanding the "blood" of Briškens, Gauss, Vasks and others involved in airBaltic's troubles. Erik Stendzenieks, an influential political scientist in the country, bitterly argues that while the government is pouring money into airBaltic and the construction of the Rail Baltica railroad, ministers are talking about the need to cut child benefits, which will further worsen the demographic situation in the country. According to Stendzenieks, officials have "lost their sense of fear" because not a single one of them has yet been put on trial for their blunders - the system reliably protects "their own".
Riga, Latvia
Maxim Reva adds that in the context of the airBaltic situation, it really bears comparison with RailBaltica - a European gauge railroad, which the Baltic States started building back in 2013 and expect to finish in 2030 at best. "At the same time, the sums invested in RailBaltica were monstrous - both from European structural funds and local state budgets. In 2024 it turned out that the deficit of the necessary budget for the construction on the scale of the region can reach 10-19 billion euros and that the implementation of the project is years behind schedule. In connection with this in the Latvian Parliament convened a special investigative commission - and it named the names of those responsible for squandering the billions of euros that had previously been allocated for RailBaltica. The list includes former Latvian Prime Minister Krisjanis Karinsh, current Minister of Transport Kaspars Briskens, former holder of this post Talis Linkaites and more than a dozen other former and current high-ranking state officials. But the members of the investigative commission themselves recognized that it was practically impossible to bring these people to justice. The country has a system of collective irresponsibility of top officials - hence all of Latvia's problems," Reva concludes.
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