Air Baltic faces dire financial straits; Estonia has backup plan
If Air Baltic fails to repay a €30 million short-term loan by end of August, the EU may investigate illegal state aid, and the airline could cease to exist. Estonia is preparing for the worst, relying on route subsidies.
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Air Baltic is in a difficult financial position with few good options. If it doesn't repay a €30 million short-term loan from the Latvian state by the end of August, the European Commission could launch an investigation into illegal state aid. EU rules allow a company to be rescued with state aid only once every 10 years, and Air Baltic has already received such support. In the worst case, the airline could disappear.
The loan was extended after turmoil in the Middle East pushed up fuel prices and required repatriation of people. Air Baltic abandoned its fuel hedging in the first quarter to free up liquidity, worsening its situation.
A bondholders' meeting is scheduled for August 3, where the airline hopes to secure temporary financing. Air Baltic issued €380 million in high-yield bonds, of which Latvia bought €50 million. The company has already breached bond terms, and Fitch warned it could become insolvent this year.
According to Arkadi Berman, an intern at SEB Markets, Air Baltic's bonds are trading at 32.6% of face value, indicating high default risk. Equity stood at minus €249 million as of March 31, with free cash of only €16 million. Annual interest expenses are about €55 million.
Latvian Prime Minister Andris Kulbergs said on July 20 that talks are ongoing with three potential investors. He emphasized that state ownership should be minimized. Latvia owns 88.4% of the airline, Lufthansa 10%, and Aircraft Leasing 1 1.6%.
Air Baltic is crucial for Estonia's air connectivity, being the sole operator on many routes from Tallinn. If it disappears, passengers would need connecting flights, and fares could spike. Estonia's Deputy Secretary General for Mobility Sander Salmu said Estonia is not considering buying a stake but relies on its route subsidy program to maintain connections. Tallinn Airport board member Eero Pärgmäe noted that losing Air Baltic would be a setback, but Estonia would not be cut off from the world.
Air Baltic stated it continues to implement its updated business plan and confirmed the August 3 bondholders' meeting. The airline said operations are normal and the financial process will not affect flights or passenger services.
