The situation of the airline industry in the three Baltic states, namely Estonia, Latvia and Lithuania, is an interesting one. Growing passengers, routes and traffic numbers indicate that the population affords to travel more frequently and is ready to do so. However, as history/experience shows, the situation can take a 180-degree turn in an instant, as Small Planet Airlines closure has showcased.

Among all three Baltic states, there is one major carrier (I’m using the term “major” very loosely), two regional carriers and several charter airlines that offer ACMI, wet and dry lease services. In the article, we will look only at the first three. 

At the moment, only Latvia and Estonia own (at least in part) scheduled passenger airlines that operate from these countries. While Lithuania had attempted to establish a regularly scheduled airline, both flyLAL and Air Lituanica came to an end in a spectacular and quite controversial fashion.

Profiles: airBaltic and Nordica

The Latvian government has had an up-and-down relationship with airBaltic. Initially sharing the ownership of the airline with SAS and several other investors, the country’s government became the majority stake owner after the start of the financial crisis of 2008, when SAS sold their shares in airBaltic. After a few years of huge losses, airBaltic finally turned things around and posted a net profit of €1 million for FY 2012.

Also, the Paris Air Show 2019 was full of excitement for airBaltic, as the airline was one of Airbus ambassadors at Le Bourget. airBaltic was sharing their experiences with the A220 –  an aircraft due to become the backbone of the airline’s fleet. airBaltic is slowly phasing out its Boeing 737 and Dash-8 Q400 aircraft. Formerly known as CSeries, the 145 seat aircraft has allowed airBaltic to further reduce costs and, as a result, introduce routes that have less demand, yet still could be profitable with an A220, but a Boeing 737-500 would provide a loss.

 

In 2019 alone, airBaltic has added 5 A220‘s to the fleet, as the Latvian airline plans to add three more. The airline has ordered a total of 50 A220 aircraft from Airbus, and so far (as of May 2019) operates 19 of them.

Estonia’s flag carrier, Estonian Air, made its last landing on November 8, 2015. Less than 24 hours later, Nordic Aviation Group (NAG; now ‒ Nordica) began its flights. Formally, the new airline was not a legal successor of Estonian Air, although it operated similar routes. In fact, the main goal of NAG was to continue the routes operated by Estonian Air. 

But the airline, currently owned by the Estonian government, is not even an airline. Nordic Aviation Group was a company that brings several airlines together to operate flights. The first flight from Tallinn to Amsterdam was sold using Adria Airways ticketing solutions and operated by the now-bankrupt FlyBMI. Overall, cooperation with other airlines is very prominent throughout the history of the airline. In 2016, Nordica signed an extensive partnership with LOT and the Estonian airline started using LOT’s ticket sales systems. In addition, LOT Polish Airlines took a 49% stake in Regional Jet, Nordica’s subsidiary, which also provides flights to Nordica, LOT Polish Airlines and SAS.

Comparing the numbers to 2018 – Growth, expansion and more confusion

airBaltic is showcasing exceptional growth – during the Q1 of 2019 alone, the Latvian airline has carried 12% more passengers compared to the same period in 2018. The tendencies have stayed the same throughout April and May, with 23% and 22% more passengers compared to last year, respectively. airBaltic managed to improve further in the following quarter, as it carried 2.2 million passengers in H1. June was also a record month for the Latvian flag carrier – more than 500.000 passengers boarded airBaltic’s aircraft, an improvement of 24% compared to the same month in 2018.

The record month does not come off as a surprise. As the airline increased its capacity (14% more flights than in June 2018) and added new routes from Riga International Airport (RIX) to such locations as Dublin (DUB), Kos (KGS) and Menorca (MAH), airBaltic has positioned itself perfectly to serve passengers during the peak travel season.

The sun sets in the North

While some airlines in the Baltic States are enjoying success in 2019, Nordica is seeing the sun set in front of its eyes. During the first quarter of 2019, the airline’s passenger numbers fell by 16% to just over 102,000. The downturn was caused by “the closure of unprofitable routes at the end of 2018 and the start of this year,” according to Nordica. In Q2 of 2019, Nordica carried 143,000 passengers, which is 30% less compared to the same period in 2018. Once more, the Estonian flag carrier pointed out that the airline reduced its capacity by one-third in the Q2.

The  Estonian airline will close five additional routes in the fall and is also preparing to transfer ticket sales and customer service to LOT Polish Airlines, while Nordica will only operate the flights. The airline is shaking off the commercial risk and is transferring it to LOT Polish Airlines, according to its press release. Essentially, Nordica will become an ACMI operator without owning a single aircraft, as Nordica’s subsidiary Regional Jet operates flights for Nordica and other airlines, including LOT. Nevertheless, Nordica will start developing its own separate ticketing system to “ensure readiness for independent ticketing in the future”.

On the other hand, 2018 was the most successful year for Regional Jet, as the operator carried more than 2.2 million passengers. The Estonian airline is hopeful for 2019 as well, as the carrier is planning further growth.

The planned growth, however, is to take place away from Estonia. For example, the airline will continue operating flights from Stockholm to Arvidsjaur and Gällivare. Swedish local governments have commissioned both routes to further improve connectivity within the country. While at first the two parties signed the initial contract up to October 2019, Regional Jet has announced that the deal was extended further to 2023.

 

As a result, questions are being raised whether Nordica will shrink further or the consolidated profits of Nordica and Regional Jet will allow the Estonian airline to sustain its operations and grow further.

Looking into the second half of 2019

Expanding foreign low-cost carriers and a shrinking population in the three countries pose threats to the Baltic airlines. In addition, global factors like the ongoing trade wars and rising tensions in Iran, one of the main oil producers in the world, can cause a downturn in profit margins.

airBaltic seems to be growing further and is making Riga International Airport into a mega-hub that will serve the three Baltic States. In addition, airBaltic has expanded aggressively in Tallinn, introducing new routes and undercutting Nordica. As a result, Nordica had to cut routes that airBaltic also competed in. The Latvian airline became the number one airline in Tallinn Airport, achieving 19% of market share there.

For example, Nordica will no longer operate the route Tallinn (TLL) – Copenhagen (CPH), a route currently operated only by Nordica and airBaltic. An identical situation has occurred with routes originating from Estonia’s capital to Vienna (VIE) and Vilnius (VNO).

The expansion of low-cost carriers also puts a threat to local airlines. The expansion of Wizz Air into Tallinn has forced Nordica to cut another route to Kyiv International Airport (IEV).

However, it seems like airBaltic is better prepared for the competition than Nordica. Homogenizing the fleet, thus reducing costs will provide airBaltic with an opportunity to combat the competition from low-cost carriers like Ryanair and Wizz Air. That is the most important goal of airBaltic in Vilnius and Tallinn, as Riga International Airport has already become a fortress of airBaltic, where the airline holds 60% of the market share.

Another advantage of airBaltic is that it runs a successful hybrid business model. The airline offers passengers the option to travel for the same basic fares that low-cost carriers offer.

But if a passenger wishes to do so, he can pay a premium for more services while flying and even book tickets in Business class. Plus, airBaltic has a multitude of partnerships with airlines like Air France, British Airways, Etihad, KLM and others, thus offers destinations that are unavailable to both low-cost carriers and, well, Nordica.

All in all, with Nordica putting its focus on strengthening Regional Jet as a charter and service provider outside of Estonia, the doors have been blown wide open for airBaltic to become the number one scheduled carrier within the Baltic states. The Latvian airline has already laid down strong foundations in Tallinn and with a dedicated Airbus A220 based at Vilnius International Airport (VNO), airBaltic is preparing to fight off the competition in the Lithuanian capital. However, the flag carrier of Latvia might have a price-war of attrition on its hands – Ryanair, the biggest airline by passengers flown in Lithuania, is not afraid to get its hands dirty, showcased by the price war between Lufthansa and Ryanair in Germany.