Why Lithuanian airlines fail while Latvian and Estonian prosper

Vilniaus oro uostas
Vilniaus oro uosto nuotr.

The first military airplanes started flying from an airport located in Kaunas, Aleksotas, in 1919, and in on 26 July 1921, the first passenger route Königsberg–Kaunas was launched, operated by German planes. A little later, airplanes of Latvian, Russian and Polish airlines started landing in Kaunas, the capital of Lithuania at the time. In 1938, an airline company titled “Lietuvos oro linijos” (Lithuanian Airlines) was established. It used two six-seat Percival Q 6 airplanes to fly passengers from Kaunas to Palanga, a resort town on the Baltic coast, and later to Riga, Latvia.

After Lithuania regained independence from the Soviet Union in the early 1990s, the Vilnius chapter of Aeroflot, the Soviet national airline, was spun into “Lietuvos avialinjos” (Lithuanian Airlines).

“In 26 March 1990, when I took a flight on a TU-134 from Kiev to Vilnius, (the ticket cost 19 roubles), the airplane still had the Aeroflot logo, but the passengers were told that the flight was operated by Lietuvos Avialinijos. In 1993, I flew back from Stockholm on the Lietuvos Avialinijos TU-134 plane. These noisy airplanes were gradually phased out, leaving only the more silent JAK-42, and later they were also replaced by Boeings,” Robertas Pogorelis, travel expert and author of the book “Mokėk keliauti“ (“Know How to Travel”), tells LRT.lt.

He recounts how Aeroflot’s Kaunas chapter was made into an airline called Lietuva (Lithuania), using JAK-40 airplanes. “I travelled with this airline numerous times from Kaunas to Budapest. Later, JAK-40 were replaced by ATR-42 airplanes with propeller engines. In December 2004, one of these airplanes brushed tree tops and almost crashed while landing in Kiev. In 2005, Lietuva went bankrupt,” Pogorelis continues.

Fifteen years ago, Lietuvos avialinijos operated up to ten routes. These included destinations to Moscow, Kiev, London, Frankfurt, Copenhagen, Stockholm, Warsaw and Tallinn. As geography expanded, flights to Amsterdam, Paris and Berlin were added.

Travel expert Pogorelis remembers that there were attempts to set up other, smaller airlines that would carry out regular flights: “From 2005 to 2006, Amber Air was in business and used to operate flights from Palanga to Hamburg, while from 2009 to 2010, Star 1 airlines operated several routes from Vilnius to Western Europe, unfortunately, both of these companies were unprofitable and did not last very long.”

With the boom of low-fare airlines and online ticket sales in Europe, there came a vogue of having the word “Fly” in airline names. That is how in 2005, after the the national airline Lietuvos Avialinijos was privatized, it became FlyLAL-Lithuanian Airlines. The company existed until 2009 when it went bust.

It coincided with the year when Vilnius was the European Capital of Culture, becoming all but inaccessible by air at the time when it hoped to attract visitors.

Slow start

Simonas Bartkus, former commerce director of Air Lituanica, recalls that the start of Lithuanian airlines was slow due to the fact that until Lithuania joined the European Union (EU) in 2004, the country had existed in a “closed bubble”.

“This means that all the flights were operated on the basis of bilateral agreements between countries. In order to have a flight route, the governments of specific countries had to come to an agreement to let the airline companies carry out flights to specific destinations. […] This environment allowed Lietuvos Avialinijos, in whatever shape it was, to operate.

“I think the setting began to change after we joined the EU in 2004 and foreign companies swooped in to take over the most profitable destinations. In the time of privatization, some serious restructuring was needed in order to at least cut the costs to the level of competitors that were already flying to Lithuania,” Bartkus recalls.

In an effort to free Vilnius from its relative isolation, the city’s municipality decided to set up a new airline, Air Lituanica, which carried out its first flight from Vilnius airport in 30 June 2013, to Brussels. From the very inception of this company, there has been much debate on whether or not Air Lituanica was needed and how much tax payer money should be poured into it.

The story ended on 22 May this year, when the airline released a statement, saying that Air Lituanica could no longer ensure that it would be able to meet its financial obligations and was therefore going out of business.

Žygimantas Mauricas, an economist of the Nordea bank, notes that that Air Lituanica, as well as FlyLAL-Lithuanian Airlines before it, failed because they did not have a clear business strategy.

“Lithuania or Vilnius, where airlines largely concentrate their operations, are too small a markets for the companies to last. The business model itself is impractical and is doomed to fail, because, for example, low-fare airlines have one strategy – to fly passengers to airports with very cheap taxes.

“These airlines aren’t very comfortable, but they are cheaper. Much of their income comes from government subsidies. Meanwhile Lufthansa has a very strong position in cargo shipping. All in all, it is very hard to make profit just from flying passengers, especially in a country like Lithuania,” Mauricas tells LRT.lt.

According to the economist, it would have been best to create a single Baltic airline, or to subsidise specific flight routes using a market auction principle, because an auction would ensure that governments do not overpay subsidies.

“Let’s suppose that Vilnius Airport announces it needs a connection to Brussels. If nobody responds, it could offer a subsidy of EUR 1,000 per flight. The sum would be raised to 2,000 or 3,000 until someone accepted. Alternatively, they could do an auction and invite all companies, saying we will work with those who will accept lowest subsidies,” Mauricas proposes.

Problems with Air Lituanica

Travel expert Pogorelis says that Air Lituanica had two major problems which led to the company’s unsuccessful end.

“First of all, there was a lack of investment funds needed to cover losses of the first several years of operation. Without a strategic investor, the company increased its authorised capital in questionable ways, first by using municipality capital. Second, this company was seen as a political project of one person, [former mayor of Vilnius] Artūras Zuokas, from the very beginning, which is a huge risk in itself. The airline did not have the backing of the national government and it was constantly criticised by rival politicians. This is a different situation when compared to the case of, say, AirBaltic in Latvia,” Pogorelis explains. He thinks that if the business plan is well prepared, a passenger airline business can achieve profitability in two to three years, at best.

Travel expert Rimvydas Širvinskas, owner of travel website Makalius.lt, says that the more time passes, the harder it becomes for Lithuania to enter the market with its own airline: “If we’re going to try and set up an airline company, Lithuanians will have very little faith in it. There will be few who will want to buy airplane tickets, because that company will be condemned from the very beginning, and many will not trust it and say that it will go bankrupt.”

Širvinskas thinks that it is common practice in Lithuania to end things abruptly: “When things don’t go well, we drop everything quickly – that is the case with Air Lituanica. AirBaltic, the Latvian airline, was unprofitable for a long time, even on the brink of bankruptcy at one point, but the government provided support a few years ago. For seven or eight years AirBaltic was making losses, but now they report huge profits yearly. All it needed was to wait, expand and acquire more flight routes. Business cannot exist with two airplanes, and Vilnius airport must be a connection point. But Latvians have already done that, so should we repeat it?” asks the travel expert.

What Latvians and Estonians do differently

After Air Lituanica ceased operations, Estonian Air added additional flights between Vilnius and Tallinn, from 6 to 11 per week. Estonian Air holds the highest share of the market of all airlines in Tallinn Airport.

“Before optimising its operations, Estonian Air was also mostly loss-making. Previously, they had plenty of destinations and operated many flights. Two or three years ago, they reduced the number of their flights and gave up the big Boeing 737-500 airplanes and purchased Embraer aircrafts (Air Lituanica then rented them from Air Estonia). The Estonians noticed that some routes could be operated by AirBaltic, so they only kept the profitable ones for themselves. Their situation is improving now,“ Širvinskas tells LRT.lt.

Meanwhile, AirBaltic started off as a business flight company, but later took up cheap flights, too. “This airline gives publicity to Latvia and welcomes new visitors, as well as invites them to visit the old town during transfers. […] I don’t think we can achieve the same level, to have our airport the same size as Riga Airport, and also have the same number of flight routes. Even though the population of Latvia is smaller, Riga Airport makes more connecting flights. Riga is a is only a connecting stop, but money  stays in Latvia,” Širvinskas explains.

When comparing Vilnius and Riga geographically, Riga is a bigger city than Vilnius, even though Lithuania is a bigger market, which means that both airports hold the same potential. In comparison, Tallinn has a smaller potential in both regards.

“If we were to compare the existing situation in Tallinn and Riga, both markets have a dominant carrier. That is not the case in Vilnius, where there are many competing companies, which creates more flexibility for the passengers,” Pogorelis explains.

According to him, Vilnius Airport is close to Belarus, which means that a growing number of passengers serviced in the airport are travelling by transit from or to Belarus: by land to Vilnius and on an airplane onwards.

“Tallinn has fewer transitional passengers, while in Riga they are of a different kind – transfer passengers changing from one flight to another. It is also worth noting that Riga airport is the only airport in the Baltic states that organises transatlantic flights: Uzbekistan airlines fly from Tashkent to New York via Riga,” Pogorelis says.

According to Mauricas, AirBaltic picked a very valuable brand name. “It’s better than ‘Air Latvia’ or ‘Air Lithuania’. Latvians decided that this would be their strategic investment, and I think it was a successful one. We were like a third brother – even though we tried doing something similar, we did not succeed,” says the economist.

Bartkus, the former director of commerce at Air Lituanica, assumes that it was the totality of circumstances that led to the situation where Latvian and Estonian airlines keep flying while Lithuania does not have its own carrier.

“There is much support from the state in Latvia and Estonia. Even when governments change, there is still consistent support from the state and public institutions,” Bartkus concludes.

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