Skift Take

Six years ago, Air Baltic took a chance on an airplane that few carriers wanted. Now, that decision has proven to be the right call. But Air Baltic can't remain independent forever, right?

Almost two decades ago, Martin Gauss, leader of a small German airline, emailed David Neeleman, founder of JetBlue Airways. Gauss admired Neeelman’s plucky startup, and wanted to learn what made JetBlue so popular.

Neeelman invited him to New York, and the two executives discussed how Neeleman focused on customer satisfaction by offering goodies like free potato chips, while investing in technology, including live television. Europe was still dominated by established players, many of which couldn’t — or wouldn’t — innovate, even as low-cost competition threatened their margins.

“It was a revolution for me, coming from Europe,” Gauss said. “It was really cool. All the blue chips? Can you imagine? And they had a boarding pass that was coming out of a printer. It was all the little things.”

Gauss returned to Germany and wrote a restructuring plan for his airline, called dba. It no longer exists — Air Berlin bought it in 2006 — but for the past seven years, Gauss has brought pieces of JetBlue’s ethos to Latvia, where he is CEO of Air Baltic.

Like JetBlue in the early 2002s, Air Baltic is a scrappy underdog trying to keep pace with larger competition. It’s not a startup — it began flying 23 years ago — but it still receives considerable attention for being more innovative and perhaps more passenger friendly than Europe’s largest airlines. Among other things, it claims it was the first airline in the world to accept bitcoin as payment.

“We are not copying anything from JetBlue, but my thinking of running an airline goes in this direction,” Gauss said in an interview last month at the Aviation Festival in London, an industry conference. “If you are not making the customers happy, sooner or later you’re not going to be successful.”

No one will confuse Air Baltic was Emirates or Etihad, but Gauss said he wants the airline — the world’s most punctual last year, according to industry data — to take care of passengers.

“I believe that this customer-focused approach will work at any time if you do it right,” Gauss said.

Unusual Model

Air Baltic is not the typical low-cost carrier.

It’s 80 percent-owned by the Latvian government, though Gauss said ministers stay out of the airline’s affairs, which is important, considering Air Baltic’s two biggest discount competitors — Ryanair and Wizz Air — don’t worry about government meddling with commercial decisions.

It’s also a hub-and-spoke airline, mainly shutting passengers to and from its hub in Riga, mostly within Europe but also to Abu Dhabi. Typical low-cost and ultra-low cost carriers don’t permit connections, because a point-to-point network is cheaper to operate. A low-cost airline runs efficiently because it does not transfer checked luggage between flights, for example.

On the product side, Air Baltic has a true business class, where hot meals are free, even on the shortest flights. Many discount airlines sell extra legroom seats, but don’t offer full-service to any passengers, to maintain efficiency. In economy class, however, Air Baltic offers typical no-frills service, where passengers pay for everything, including sodas.

Its unusual model extends to fleet, too. In a business where bigger is almost always better because more scale leads to lower unit costs, Air Baltic remains small.

For now, Air Baltic has 35 aircraft, and while it plans to grow, its plans are measured. In a best-case scenario, if it exercises 30 options with Airbus, the airline would have 80 jets by 2024. That’s tiny compared to Ryanair (400 jets today) and Wizz Air, which has more than 100 now and wants to nearly triple in size by 2026.

Air Baltic also flies smaller jets than the competition. While that makes sense — the Baltics are not a huge market — discount carriers usually fly the largest narrow-body jets, packing them with as many seats as possible to reduce costs. Ryanair puts 189 seats in its Boeing 737-800s, while Wizzair has 230 in its Airbus A321s.

Unlike the others, Air Baltic is pinning its future on an new aircraft with just 145 seats, the Airbus A220-300. It has a dozen, and they often receive rave reviews from passengers for their comfort and from airlines for their fuel efficiency.

The A220 is a popular aircraft, with several carriers, including Air Canada, Delta Air Lines and JetBlue Airways placing orders within the past two years. (Neeleman has also ordered them for his new U.S. startup, which should start flying by 2020.)

But when Gauss committed to it in 2012 — at the time, the program was owned by Bombardier and the jet was called the C Series — few carriers wanted it. Six years ago, airlnes almost always preferred proven technology from Airbus and Boeing, and Gauss said he was close to going with the Airbus A319 before Bombardier changed his mind.

For Gauss, the gamble paid off, and the jet has become a competitive advantage.

“What was then a desperate Bombardier likely gave Air Baltic the kind of good pricing that often wouldn’t be available to a smallish airline with a spotty financial history,” said Seth Kaplan, managing partner of Skift’s Airline Weekly. “Now that the aircraft is flying and seemingly performing well, this could be an enduring competitive advantage over other smallish European airlines, which might not be able to go out and get similar deals.”

Murky Future

Gauss is a realist.

He knows smallish government-owned airlines rarely perform well over the long term. Today, the airline is in OK financial shape — Air Baltic produced 4.6 million euros, or $5.3 million U.S., in net income last year — but that’s partly a function of its niche model.

Established airlines don’t necessarily view it as a threat, so they’re less aggressive in matching its routes or fares. But if Air Baltic becomes a formidable competitor, which could happen once it has 50 or 80 jets, full-service and discount carriers might take it more seriously, threatening its market position.

Eventually, Gauss said, Air Baltic’s owners may need to pursue another strategy. They could sell to private equity, he said, and the new owners could pursue an initial public offering. Or Air Baltic might be acquired by one of Europe’s larger airline groups — International Airlines Group, Lufthansa Group and Air France-KLM. (Gauss said the government does not mind relinquishing control as long as it can guarantee Riga retains robust air service.)

But Gauss said an acquisition might be premature.

“We as a smaller airline are not on the radar screen of everybody because it takes resources to take on an airline,” Gauss said. “I think we have to be a little bigger for the major carriers to say, ‘OK, let’s look at this.’ We are probably coming now to this level but before we would used up a lot of resources. There are other candidates the big airlines can look to first.”

As he waits to see how landscape will evolve, Gauss said Air Baltic is content to dominate low-cost traffic in Latvia, Lithuania and Estonia, where it has considerable edge. According to Kaplan, Air Baltic is nearly double the size of Ryanair in the three countries, measured by seats per sale.

Gauss said Air Baltic’s planners are confident they can find viable routes from Baltics for the airline’s 50 firm orders. But if the airline exercises its options, he said the airline could expand with a base elsewhere in Europe.

He declined to say where.

“If we would say it today — as it is only happening in a couple of years — it would be pretty stupid because then competition would say, ‘OK let’s do this first,”‘ he said.


Air Baltic doesn’t just treat its customers better out of altruism.

Rynanair and Wizz Air both have “massive scale and larger aircraft,” Kaplan said, giving them a structural cost advantage. To make up the difference, Air Baltic needs to command a revenue premium, and that’s often achieved by offering a slightly better product that caters to high-end leisure and business travelers.

Air Baltic usually flies to the most popular European airports, where costs and average fares are higher. And while Ryanair sometimes flies a route just a few times per week, Air Baltic prefers to go at least double daily in mature markets.

“People need to be willing to pay a bit more to fly it than to fly Ryanair or Wizz,” Kaplan said. “Air Baltic seems to attempt to drive that preference that by offering a slightly more upmarket product and more frequent, business travel-friendly flight schedules.”

Gauss suggested it’s a strategy that can work long-term, and one that will be buoyed as the airline takes delivery of more next-generation jets.

“If you have a lot of competition and the ticket price is the same, how does the passenger decide what he is going to buy?” he said. “If it is the same ticket on the same route, you take the emotional decision. What we deliver at Air Baltic, we deliver emotion. We do it through our way of how we do the service, and now through the aircraft.”


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Tags: air baltic, airline innovation, david neeleman, european airlines, jetblue airways

Photo credit: Air Baltic is staking its future on a new jet, the Airbus A220-300. The airline ordered the aircraft in 2012, when it was still controlled by Bombardier. Air Baltic

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