This State-Owned European Airline is Considering an IPO

Sometimes you have to talk to a small carrier to learn what’s really going on in the industry.

Dear readers,

Just as Sun Country in the United States has learned that it’s more profitable to transport packages than people (at least temporarily), Latvia's Air Baltic has made a similar discovery with wet-leasing aircraft to more established carriers. The government-owned airline, which is planning an IPO (perhaps this year) to raise cash for future growth and add a wider group of owners, is making big money leasing Airbus A220-300s, with crews, to Lufthansa Group airlines.

This segment of its business is remarkably profitable. In the second quarter of this year, Air Baltic's wet-lease (or ACMI) flights produced an adjusted EBITDAR margin of 64.2 percent, an increase of 4.7 points year-over-year. The airline's much-larger scheduled service (it produces three times more revenue) reported adjusted EBITDAR of 16.5 percent, down 8.6 points year-over-year.

Perhaps you didn't expect me to dump this email into your inboxes this morning, especially as we await news from today’s Southwest investor day (more on that from me soon), but I find Air Baltic fascinating. Part of it comes from my fondness for German-born CEO Martin Gauss, an indefatigable and friendly fellow who has spent years trying to persuade me (and every other journalist and potential investor) that Air Baltic is a real business. Sure, the government owns 98 percent of the airline, which produces more than 2.5 percent of Latvia's GDP, but with an IPO in sight, Gauss wants potential investors to view it as more than just another sleepy government-held airline that flies everywhere politicians want it to go.

Gauss is an interesting character. In a industry in which so many ex-pat CEOs come and go every couple of years, to and from these random national airlines, Gauss has been a fixture at Air Baltic since November 2011, a few months after he quit the top job at Malev (RIP) over a disagreement over pay. I believe I first met him in 2016, and I've grown to appreciate both his brutal honesty (maybe it's a German thing) and his willingness to answer any question, as well as his seemingly endless optimism for Air Baltic’s future and Latvia's economy.¹

Even if you don’t care about Air Baltic, I think Gauss’s comments give us a view into what is really happening in Europe and how CEOs from larger airline groups think. When Carsten Spohr and Ben Smith² speak, almost anything they say makes news because their companies are so large and influential. But they don’t say much. I learned a lot from my recent conversation with Gauss — we discussed Air Baltic’s wet-lease business, the IPO, the future of the network (could the airline ever fly to the United States?), whether it has enough ideas (beyond wet-leasing) of what to do ]with airplanes in winter, and yes, why he's a little peeved at engine manufacturers.

Let’s take a look at the highlights of the discussion.