Setting the stage for its initial public offering (IPO), Latvian flag carrier airBaltic is gaining momentum, having secured pre-IPO investment to strengthen its position to better navigate building headwinds. Calum Wilson reports.
Rumours of Lufthansa Group’s interest in taking a stake in airBaltic had been swirling in the sector for some time but the news was only confirmed in late January 2025 when the German airline group announced a €14 million investment into the Latvia state-owned airline, acquiring convertible shares representing a 10% stake in airBaltic.
The convertible share will be changed into ordinary shares upon airBaltic’s upcoming initial public offering (IPO), with the size of the stake to be determined by market pricing and Lufthansa’s share amounting to no less than 5%. Once completed, Lufthansa will receive a seat on the airline’s supervisory board as part of the transaction, which is expected to close in the second quarter of 2025.
Only a couple of weeks ahead of the announcement, Airline Economics met with airBaltic CEO Martin Gauss in Dublin during the Growth Frontiers conference. When asked about the investor rumour, Gauss acknowledged that it had “been around for quite a while” but when pressed maintained that he was not able to comment. However, he did confirm that pre-IPO investor discussions were “ongoing”. Speaking onstage at the conference, Gauss said that the airline was looking for the “right partner that fits into our strategy”.
The company had initially aimed to launch the IPO in 2020, but it was pushed back by the pandemic, and then pushed further back after the Russian invasion of Ukraine in February 2022. Gauss said that Latvia’s proximity to Ukraine made the country a “big part of our business” and the impact of the war on the airline continues. The IPO was then scheduled to launch sometime this year, but during the conference, Gauss hinted that its launch could be pushed into the latter half of the year – potentially pushed even further back into the first quarter of 2026.
For Lufthansa, taking a small stake in the airline enables the continuation of its partnership. Speaking to Airline Economics, a spokesperson for Lufthansa said: “From our point of view, the advantage of the deal is that we are making a long-term strategic commitment to each other without entering into any further/post-IPO financial obligations.”
Lufthansa said that the transaction would further develop cooperation between the two parties, allowing for the development of wet lease services. The two parties had recently extended wet lease agreements for a further three years beyond summer 2025. The partnership will allow Lufthansa to deploy up to 21 additional aircraft of the A220-300 this summer and five aircraft in winter of the same type. The company said this would allow the airline to “more flexibly” respond to customer demand this summer.
The spokesperson for Lufthansa emphasised that the transaction was aimed at strengthening its partnership with airBaltic and in turn reinforcing its wet lease agreements, which “remains a primary focus” for the group.
“As of today, it is too early to comment on any post-IPO plans yet,” the spokesperson added. “A consolidation is not a concern for us at the moment.” The group only finalised its 41% stake in ITA Airways on January 17, 2025, making it its fifth network airline, after the two parties had agreed upon the deal in May 2023. The transaction approved a €325 million capital increase to the Italian flag carrier from Lufthansa Group. The Italian ministry of economy and finance (MEF) will hold the remaining 59% stake.
Consolidation in the European airline market has been a key talking point for some time given the fragmented nature of the market. “We are the key consolidator ourselves in the Baltic states,” said Gauss. “In my time, there have been five airlines around us. They have all become bankrupt and we are now the largest player.” Estonian Air, Air Lituanica, Lithuanian Airlines, Aurela, and Amber Air all collapsed in the late 2000s to mid-2010s, significantly shaping the Baltic commercial aerospace market.
Gauss said that as consolidation continues, Europe is moving closer to the single European sky (SES), an initiative launched in 2004 to tackle the region’s fragmented airspace. He says this is a “positive process” for the sector and the region.
“In the ultra-low-cost sector, Ryanair is the leader with Wizz as a big player as well as easyJet,” he added. “They will stay and will not consolidate with others for a while. But there is a couple of airlines still around that might become part of a larger group. That is a natural process and a healthy one for Europe.”
He pointed to Nordic consolidation with Scandinavian Airlines’ recent restructuring and joining the SkyTeam Airline Alliance in September last year, as well as Portuguese flag carrier TAP Air still being considered for acquisition, as signs that “European consolidation will continue”. Recent rumours have suggested that British Airways owner IAG likely to be the frontrunner in becoming a majority shareholder for TAP.
However, much like airBaltic, TAP has faced several delays to its plans to privatise, which were first aired in July 2023. A snap election held in March 2024 brought in new leader Luis Montenegro, subsequently delaying privatisation plans. In May 2024, in an interview with Airline Economics during an event in London, TAP CEO Luis Rodrigues said that privatisation would be likely to “come out before summer”, though Rodrigues said he was fine if this process was delayed, noting that the new Democratic Alliance party needed to acquaintance itself with the company ahead of any privatisation moves.
A person familiar with the matter at the event indicated that, at the time, the government was in disarray with the Democratic Alliance – made up of the PSD and two smaller conservative parties – earning only a narrow victory and opined that it was unlikely any sale would complete in 2024, which turned out to be the case.
airBaltic has had its own tensions with government, coming to a head at the start of the year with the cancellation of nearly 5,000 flights for its summer schedule on January 2, 2025. The cancellations are anticipated to impact over 67,000 passengers.
Following the announcement, Latvian minister for economics Viktors Valainis called for Gauss’ resignation, local media reported, citing a loss of confidence from the Latvian government in his leadership. Gauss had told Latvian outlets he would not insist upon his role in the event that he was asked to be removed. However, he had maintained the positive feedback to his position.
When asked on this situation, Gauss appeared more resilient in his resolve to hold onto his position. “I’m not stepping down at all,” he said. “This company needs a leader. This is the consent of all the educated public, the financial world, and the airline world. To step down for no reason? No. [Valainis] made a statement that he wants me to be terminated, which they didn’t do. What more [is there] to say?”
Gauss further stated that it was “never a good outcome” to mix political issues with the business sector, further underlying the motivation towards the push for an IPO.
“Unfortunately, though, I am a part of it,” he continued. “I’m not a politician at all. I am an airline CEO, running an airline. But that airline is owned by the state. So, if the state has issues and they involve the airline, obviously the one who leads the airline is always the top news.”
He added: “I’m very confident that I will continue. At least nobody serious has said to me that I should not, and as long as my supervisors and shareholders say I should run the show, then I will continue to run the show.”
At the tail end of January, it was revealed that three members of the Latvian flag carrier’s supervisory board will step down in February, the Latvian Ministry of Transport said in a statement to local media. Chairman of the supervisory board Klavs Vasks, as well as two other members, Kaspars Ozolins and Andris Liepins, will step down.
The decision was reportedly a mutual one, made to drive change in the company ahead of the IPO. Vasks had told local outlets that discussions with the government had been “painful” surrounding the IPO, underpinning Gauss’ comments surrounding the intertwining of state and business affairs.
This was demonstrated by the summer flight cancellations, suggesting that the government’s pressure on Gauss was perhaps misplaced. The cancellations were a result of airBaltic’s continued issues with Pratt & Whitney’s geared turbofan (GTF) engines, which has grounded a number of its A220-300 aircraft leading to the cancelation of 19 routes, as well as reducing the frequencies of 21 routes for the summer.
According to Gauss, its aircraft on ground (AOG) total was around 15 and 18 aircraft at the time of the interview, and he is expecting around 10-12 AOG for summer peak season, which is less than 2024’s summer period.
“The whole [cancellation] drama was caused by us getting a forecast from Pratt before Christmas which increased significantly the missing engines for the peak summer,” he explained. “That caused our problem because it was too late for us to react, and we had to find a way to mitigate the impact.”
The forecasts are sent weekly to airBaltic’s technical team. The compiled set of data includes the expected return of engines from various maintenance shops where airBaltic’s engines are awaiting maintenance. Graphs detailing expected engine returns, seen by Airline Economics, showed clearly where the total engines impacted “just dropped” from one week to the next.
“The technical team discusses and then tells us, ‘this is more or less how you will be in six to 12 months’ and, ‘this is your situation’.” He said that, as a result, the company had to react to the forecast.
At the time, Gauss said the company was looking at wet leasing three aircraft to circumvent some of the issues. Airline Economics met with Gauss in Dublin in a time slot wedged between his meetings with both Pratt and Airbus.
“Where you sit now, the president of Pratt was just here three minutes before,” Gauss said. “We had a half hour discussion about the Pratt engines… it’s not a problem of Pratt alone, it’s a problem of our industry, of the supply chain. I’m not going to scream and shout about these problems. I want to have a constructive way forward, which means we have to solve these things in negotiations.”
airBaltic is going into its fourth year of grounded aircraft as a result of the issue. “Nobody can compensate that, despite what is said that airlines get compensation,” said Gauss during his fireside chat at the conference. “If you rely only on that, you will not be compensated for not earning money which you were supposed to earn.”
Also speaking during the Growth Frontiers conference in Dublin, Wizz Air CEO Jozsef Varai shared that around 20% of the airline’s aircraft capacity was impacted as a result of the GTF engine issue. “I’m not in the business of getting financially compensated,” said Varadi. “I’m in the business of flying passengers. When I can’t fly passengers, that is strategically harming my business strategy and my business model.”
Gauss believes a resolution to the GTF engine issues is “still a few years away”. Similarly, Joszef said at the conference that he expects the GTF engine issues to be a “four-to-five year issue”, after previously estimating the issue to be 18 months-to-two years.
Gauss added: “These discussions will continuously go as this is a dynamic process of receiving engines from maintenance.”
Varadi also said his company was continuously working with Pratt to push through the issue. He added that the GTF is a “very good engine when it flies”. Gauss reiterated this sentiment, maintaining the GTF engine “had proven to be a strong unit” with it “performing very well” during flight.
Outside of the GTF issue, Gauss appears confident; pointing to strong forward bookings and strong growth. “Our only limitation are the aircraft numbers that we are missing, which means we can’t deliver the EBITDA and we can’t deliver the revenues we would generate. Looking at the net results, the effects of the engine issues are huge.”
The airline’s third quarter revenues were up 8% in the third quarter 2024, delivering record revenues of €236 million, as well as swinging to a profit for the quarter with €40.3 million, compared to a net loss of €5.5 million a year prior. airBaltic adjusted its full year guidance downwards. Total revenue for the year is expected to be €740-750 million, while EBITDAR is set to be €190-200 million. As of September 30, 2024, the company had negative equity of €97 million.
Current liabilities exceeded its current assets by €161 million and the cash balance at that time was €55 million. In its third quarter earnings report, the company maintained it would manage its liquidity needs until the IPO equity financing begins. Gauss said the IPO will “fix” its current situation of high leverage from past debt, as well as generating a sufficient cash buffer to “go with more confidence through these rainy days”.
At the start of September last year, the company consolidated its four existing share classes into one, in order to make its “share structure even more transparent and attractive to the market” to prepare for the IPO’s launch, the press release said. The consolidation would reduce the shares’ nominal values, but would strengthen the airline’s equity by reducing share capital and using it to offset accumulated losses from prior years.
In May 2024, the airline refinanced its €200 million outstanding bonds maturing on July 30, 2024, through a bond offering of €340 million 14.50% senior secured notes maturing in May 2029. In October, it issued an additional €40 million secured notes.
“The decision to tap the existing bond was driven by the postponement of the IPO to 2025, favourable high-yield debt market conditions, and to further strengthen airBaltic’s cash position going into 2025,” the airline read in its report.
While no decision has been formalised, the Latvian government had articulated it would retain a 25% stake plus one share in the airline after the IPO. While no formal decision has been made, he said, the decision has been “articulated”.
With the IPO delayed further, and with government pressure from ongoing GTF engine issues, Gauss has maintained his position to navigate these headwinds. “In stormy times, you need a strong captain to steer the ship,” said Gauss. “When there is sunshine and shallow water, there is no problem, and anybody could do it. But I’m the one for those stormy times.”
Gauss maintained that the airline’s strength – especially in comparison to the size of its respective country – was maintaining growth despite the challenges impeding its ability to grow further. With a pre-IPO investor secured, its launch draws ever closer, further supporting its growth as it looks to double its fleet size to 100 A220-300 aircraft by the end of the decade. With such a strong resolve, perhaps Gauss truly is the one to steer this ship.