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airBaltic

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SUMMARY: The Latvian airline, airBaltic was recently a target of Russian ‘agents’ to sell it 5 x Sukhoi SSJ-100 SuperJets, though it has 13 x CS300 on order and 7 options. The Russians are desperate to open the Western market for the SSJ-100 even as they deliver only the 100th unit produced after 49 months of production (only 17 produced this year versus a planned 45 and only less than 60 in service ? yes that is right, 40 x SSJ-100’s sitting in Russia with no where to go ! it’s a fire sale now). President Putin is putting $US 2.0+ billion into the program to open the Western market for the SSJ-100 to be followed by the Irkut MC-21 narrowbody.The SSJ program is crucial to Russia’s “hopes” of becoming a major commercial aircraft producer. But right now Sukhoi is part of the Russian military industrial complex now under international sanctions, as is it’s parent company United Aircraft Corporation (UAC) and a therefore all risky suppliers. To sell the aircraft, the Russians have resorted to their well known Russian business practices and desperate measures. Recent scandals at the highest levels in Latvia and at airBaltic show how secretive and underhanded they are to make things happen. In this case a new “undesirable” and a “potential security risk” (according to Latvia’s ex-Transport Minister), German investor with very close ties to Russia’s aerospace industry and Russian ‘elites’ comes out of nowhere with $US 57 million and puts money into a desperate national airline (opposed by Latvia’s then Transport Minister who was fired for his opposition), gets 20% equity and a whole lot more. He gets the airline to change its Business Plan to include 5 x SSJ-100’s, and somehow gets exclusive rights to provide aircraft to the airline ? who agreed to that ? Thank god that whole “scheme” was torpedoed by the Latvian Prime Minister right away with the urging of his Minister for Defense. A special NO purchase/lease or utilization of Russian aircraft special clause was inserted into the Shareholders Agreement plus 20 controversial points were removed ? Where did CEO Martin Gauss stand on all of this is a big question. But this shows how Russians plan to sell the Sukhoi, use money from who knows where to invest in private small airlines, fund management buyouts, pay off executives, buy airlines from privatization, etc. Slovenia’s Bad Asset Management Company is now privatizing it’s national airline Adria Airways, with Intro Aviation in the running, a word of caution here is needed as the real Intro Aviation interest may have more to do with placing SSJ-100’s then anything else (Adria Airways has 6 x CRJ900’s and 3 x A319’s). In fact, Ireland based CityJet’s (owned by Intro Aviation and now lessee to 25 x SSJ-100’s ) Chief Executive calls the SSJ-100 a real “game changer”, seriously ? it’s a 9 year old design that faces obsolescence in the next 2-3 years as the new generation Embraer E175-E2, Mitsubishi MRJ90 and the Bombardier CS100 enter service. Some in the industry are greatly exaggerating the SSJ-100 capabilities. The fact is that till now, the only western customer was Interjet of Mexico, otherwise the rest of the customers are just Russian/CIS operators (not counting the failed operators in Indonesia, Laos and Armenia) who have no choice in Russia, but the SSJ-100. So why buy anything MADE IN RUSSIA ? does anyone buy anything Made in Russia today ? Any executive worth his salary knows that in business you must always minimize business risk where possible, when you buy a SSJ-100 you greatly increase your political risk. Tensions between NATO and Russia are heating up again after the annexation of Crimea and the provocations in Ukraine, and you put your company’s future at risk of bankruptcy if you operate SSJ-100’s. One only has to look at the fact that the vast majority of western airliners in Russia today (inc. national carrier Aeroflot) are on VP-B (Bermuda) or EI (Ireland) registration, as RU (Russian) registration is too “risky” for lessors, financiers, banks and aircraft investors. If relations with Russia deteriorate further in the future, a SSJ-100 operator will have to shut down, as new sanctions and any subsequent public and corporate boycotts/petitions against the your airline’s use of the SSJ will ground you, do not take political risk likely today. That is the world of economic sanctions, just ask the Cubans and Iranians how tough it is to keep old cars and planes operational in such an environment, so be smart, saving some money up front on a 20 year commitment to an aircraft does NOT mean that you have a great deal in the end.

In a major press announcement on December 2, 2015 in Latvia, the Prime Minister Laimdota Straujuma came out to say the government supports the inclusion of a cause in the Agreement of Shareholders that prohibits “ airBaltic and its affiliated companies are prohibited from purchasing, renting or otherwise utilizing equipment produced by the military industrial … Continue reading

UPDATE: The end of Estonian Air, and airBaltic’s new capital and it’s “undesirable” and contentious new investor and Russia’s SSJ-100 SuperJet desperate and murky measures to sell into the Western European market: As predicted along time ago, Estonian Air will shut down its operation tomorrow November 8, 2015 after today’s EU Commission order to the Estonian Government to recover the Euro 85 million ($US 92 million) in “illegal” state aid given to the state owned airline the past 5 years. This is the 2nd airline this year (Cyprus Airways back in January was forced into liquidation) that had to close down after the EU ruled that the airlines received state aid beyond the “one time, last time” guidelines for restructuring aid. Estonian Air was a cash burning operation since 2010, going through Euro 87.6 million ($US 95 million) in 5 years, with a current fleet of just 3 x CRJ-900’s and 2 x CRJ-700’s, an inept underachiever for 5 years that even according to the EU Commission, did NOT have a credible restructuring plan that ensured it will not be going back to the trough of public taxpayers money to keep flying. The airline had NO sustainable business plan, other than “white label” flying (ACMI operations) for third party airlines, which are not a long term sustainable business. Realistically, Estonia with only 1.3 million people is a small country and aviation market (only 44nm from Helsinki, a big northern hub) and Europe’s 51 independent countries cannot ALL have their own national airlines, it is just not economically viable, and state aid is NOT an option, it distorts competition against private airlines. Malev’s closure in 2012 showed that when the home airline does close down, new airlines and routes are picked very quickly by other airlines. BUT the stubborn Estonians already have Plan B in place for weeks, the same day Estonian Air shuts down, Nordic Aviation starts up and ready to use Euro 40.7 million of taxpayers money and Adria Airways AOC and throw it all away again a few years down the road, as some people will just never learn from their mistakes ! Meanwhile next door in Latvia, the state owned airline, airBaltic is about to get a Euro 80 million ($US 87 million) state cash injection to shore up its negative Euro -75 million ($US -82 million) shareholder equity so it can borrow money to finance $US 1.3 billion for the 12 ordered and 7 optioned Bombardier CS300’s, again the EU Commission will have to investigate as this is state aid to bolster a national airline, and it does affect competition. Also again there is some ‘funny’ stuff going within the airline and government has a dubious new German investor (Ralf-Dieter Montag-Girmes), very close to the Russians and their aircraft industry, buys 20% of airBaltic for Euro 52 million (US$ 57 million) valuing the little airline at a ridiculous $US 285 million, and he has been called the “least bad option” and a “undesirable” investor with “potential security risks” by the recently fired Latvian Transport Minister, Mr. Matiss. The Russians are quietly targeting airlines like airBaltic, VLM, City Jet, Greenland Express, Adria Airways, etc. for the Sukhoi SSJ-100 SuperJets by buying into these airlines through intermediaries, investing in them or management buyouts or going to bed with their existing owners or investors as billions of dollars are going into the SSJ-100 program and its ultimate success lies in breaking into the western commercial aircraft market, and it must open the door for the Irkut MC-21 narrowbody airliner due in 5 years time as well. Russia it is ready to do ALL it can, huge lease and price reductions to bribes or buying “influence” in small European airlines to place its SSJ-100’s, which has had 7 airlines go bankrupt while 8 customers which ordered 77 SSJ-100’s with 29 options have not been heard from in a long time, its all murky with the Russians, just beware !

I have repeatedly said that Estonian Air will become the next European airline forced to shut down its operation because the airline repeatedly benefited from illegal state aid for its existence. (READ BLOG of JUNE 17, 2015) Well today, November 7, 2015 the European Commission ordered Estonia to recover the state aid given to Estonian Air … Continue reading

UPDATE: Latvia’s 98% government owned airline, airBaltic will review an offer from a unknown “Chinese” investor for 49% of the airline on October 20th (only 5 weeks after China’s CEFC buys 10% of Czech Republic’s Travel Service increasing to 49% shortly and with it gains 34% of Czech Airlines, which is also 44% owned by Korean Air), the Chinese are coming to invest in European aviation, a “white knight”, though NOT on par with Etihad, but better than nothing, surely 51 European countries CANNOT all have a national airline), but for some “lucky” European airlines (Hainan Airlines owns 48% of Aigle Azur and looking to buy minority in Air Europa soon, while HCNA owns 35% of Cargolux after Qatar Airways bailed out) it has worked. This comes at a crucial time for tiny airBaltic, which is sadly the launch customer for Bombardier’s CSeries, with the first aircraft due September, 2016 (11 months away), yet the barely profitable airline does not have the money or ability to finance the pre-delivery payments ? With a negative shareholder equity value after losing Euro 190 million since 2010 the airline needs the cash investment to be able to pay for and put into service the 13 + 7 optioned CS300’s worth $US1.45 billion at list (realistically $US 900+/- million at best). This is very sad, this tiny airline (25 aircraft) should never have been selected to be a launch customer for a new commercial airliner, too small, barely profitable, operating old B737’s, no equity, no ability to finance anything and far away in the Baltics with heavy competition from low cost carriers (LCC) and even a EU airline supported by state have taken their toll on local carriers, with many having gone bust or are just hanging on (e.g. Estonian Air which is most likely about to be declared bankrupt when the EU comes out and rules on a EUR 40.7 million state “loan” as illegal, and like Malev, Cyprus Airways, Olympic Airways, it will have to be declared bankrupt, sad but they were cheating other airlines of free competition). A long term sustainable business model seems elusive in the Baltic region, though airBaltic just may have the space and investment to make it happen, in time. It sadly shows the lack of quality in Bombardier’s CSeries order book which desperately also lacks quantity (“firm’ 243, “realistic ” 140), and I am seeing another major screw up, like the Sukhoi SSJ-100 launch customer Armavia of Armenia ? (Not Russia’s flag carrier Aeroflot but Armavia ?), which quickly went bust but there were few takers in Russia for the aircraft when it came out, only until Moscow ‘ordered’ its airlines to use them. Well again, Bombardier has to “hope” for another good outcome next week, otherwise its CS300 launch customer is going to be a problem, the last thing Bombardier needs now is another problem ! Lastly, airBaltic also wants assurances that Bombardier will still be supplying and building the CSeries aircraft in five years time ! after the Airbus ‘fiasco’ now everyone is nervous about the program from existing customers, prospects, employees to investors, and in this environment of “mistrust” how can you realistically sell more aircraft ?

The direction of CS300 launch customer airBaltic ( 8 x B737-300, 5 x B737-500 and 12 x Q400’s) will be decided on October 20th when the Latvian government (98% owner of the airline) review a bid for 49% of the airline from a possible Chinese buyer and there was also interest from a German investor … Continue reading

UPDATE: Bombardier stock (TSX:BBD.B) hit a low of $1.19 on Wednesday (today it “rallied” and closed at $1.29) as it continues its spiral towards becoming a penny stock, if it was listed on the NYSE (New York Stock Exchange), it would mean possible de-listing of the stock, as Vancouver’s CHC Group (global helicopter company) is now facing for its NYSE:HELI stock that is now hovering at around $0.30 a share (-90% YTD). After my many warnings about the many questionable and poor quality of airline orders for its CSeries, investors and aviation experts are now finally starting to take notice that after 7 years of sales the current minuscule 243 CS100/300 ‘firm’ orders are in fact a whole lot smaller, with many questionable airline orders possibly as low as 130 ‘real’ orders (53% of what is on the books today). Bombardier desperately needs a NEW CS100/300 brand name airline order in the next 30-45 days to prevent the slide of its stock below $C 1.00, as that is the only way in the short term it can gain some investor confidence to stop the stock’s downward spiral. The CS100 is going to be certified in the next 3-5 months, but by then the stock will be a penny stock if no quality new order or some new un-predicted good news is forthcoming soon from Bombardier. The planned IPO of Transportation division in 4th Quarter will raise up to $US 2.5 billion for a 49% sale, but it will most likely impact BBD.B stock negatively, as the trains are 50% of Bombardier’s business, these are desperate times at Bombardier and most Canadians want to see a bright future for this promising company. With 54% of the special voting shares in the hands of the Beaudoin family, new investors are reluctant to be subordinated and a possible hostile takeover is not yet possible. But with the company at a historic crossroad, the possibility of “Combardier” (China’s Comac buying Bombardier), is a real possibility in the next 18-24 months, as this is the only major aircraft OEM the Chinese can possibly buy today, to help them achieve their global aerospace ambitions of being #3 behind Airbus and Boeing, and they are surely watching events in Montreal with great interest.

A week ago (August 14, 2015) I wrote my last blog on Bombardier when its stock price (TSX:BBD.B) was at $C1.46, since then it has dropped to $1.19 on August 19th, followed by a jump to $1.27 in a flurry of 8.17 million trades, as investors were thinking it has reached its bottom, yet without … Continue reading

SUMMARY: Paris Air Show 2015 is done, the winners were again the duopoly of Airbus and Boeing with 752 orders ($US 107.2 billion at “list price”) out of a total of 958 orders. The BIG loser was surely Bombardier which finally after 7 years from its launch, made its debut with both the CS100 and CS300 airliners, but left the show with 0 (zero) in new orders for their CSeries, Q400 and CRJ’s brands, which should be worrying, but after the show Bombardier said it was “absolutely satisfied”, with what ? The fact it had to choose the little known, barely profitable, Latvian government owned airBaltic as its launch customer for the CS300 (13 x CS300’s on order and 7 options) says novels about the poor quality of its order book. The airline’s order has a “list price” value of $US 1.44 billion, yet this airline has made a profit of only $US 11 million in the past 5 years on revenues of $US 688 million (1.6% net profit margin) ? unfortunately they have no “better” airline for such an important role. Meanwhile Bombardier now seriously talks of a stretched 160-180 seat CS500 to challenge Boeing and Airbus ? really ? it’s stock price keeps dropping, (TSE:BBD/B) is at $C 2.25 today down 45.8% YTD (year to date) and the corresponding drop in market capitalization to only $US 5.11 billion, investors are worried and Bombardier wants to spend more money on a CS500 to take on the big duopoly of Boeing and Airbus head on in the most lucrative market, the single-aisle/narrow-body segment ? Individual losers were the A380, A350-1000 and the MRJ, with no new orders, while little known Viking Air of Canada announces 50 “orders” from China for its pricey $US +7.5 million Series 400 Twin Otter even though the Chinese have a similar, good performing, FAA certified and cheaper Y-12E ? Embraer celebrated its 2 year anniversary at Paris of its E2 launch, booked 25 E2 orders at the show and now has 325 firm orders, while the CSeries is now 7 years past its launch (July 18, 2008) with only 243 firm orders, but realistically it is only 130 orders at best. ATR books 46 orders and 35 options at the show, as it solidifies its market dominance in the large turboprop market segment after 160 firm orders in 2014. Sukhoi’s SSJ-100/95 gets an order for 3 as shamefully up to 33 “white tails” (out of 85 delivered, or 39% of delivered aircraft) await customers even with price discounts of 56%, while the program struggles with production, sales, marketing, corporate governance and politics, as 51% partner Finmeccanica (Italy) is restructuring and understandably contemplating its exit from the Italian-Russian joint venture and surprisingly it also has doubts on its future with the very successful ATR program where its fully owned subsidiary Alenia-Aermacchi is a 50% partner with Airbus Group. Airbus and Boeing want to increase production of single aisle/narrow-body airliners (B737Max now has 2,773 orders and A320neo has 3,854 orders) to a possible 115 per month (Boeing to 52, Airbus to 63) by 2018 ! is that over optimism in this unprecedented period of growth ? can the already over extended supply chain even handle the extra work ? With an average monthly delivery of 112 aircraft in 2014 of all sized aircraft by both OEM’s (1,349 units), the latest Boeing 20 year forecast of 35,560 aircraft would translate to an average of 148 aircraft per month for all sized aircraft by both OEM’s, an increase of 32% on 2014 delivery numbers, with new orders in 1st half of 2015 already down on 2014 ? What role do speculative orders play in this order frenzy ? Deals at Paris are always quoted in List Prices but who is getting a good deal ? are you getting a good deal ? how do you know you got a good deal when almost everyone gets a discount, no one pays List Price and it is all so secretive, so how low can Boeing and Airbus go ? how about 64% off on big orders ? yup, enough to make sure that new competitors like the CS500, C919 and MC-21 do not win orders based on price. Lastly, Russia’s aggressive stand against NATO is seriously raising tensions in European countries on the Russian border, since 2008 Russia has annexed and integrated 4 Russian speaking enclaves/territories from 3 of its neighbors (Georgia, Moldova and Ukraine), now open conflict is a real possibility, and Russia’s military thinks a small tactical nuclear response today is possible without triggering a WW III ! in this political environment it is time for tough economic sanctions on Russia and especially its aerospace industry, the Sukhoi SSJ-100 is getting lots of financial support from President Putin, as it is the only Russian commercial aircraft ever built with any western appeal. It is time to stop buying Russian aircraft and stop ALL support for Russia’s aerospace industry, as any military conflict with Russia will make corporate profits absolutely irrelevant anyway !

With the 2015 Paris Air Show now behind us, it is worth to look at the final results of the big aerospace event and analyze the winners and the losers as it gives a pulse on which OEM’s are on top of their game and those that are not. —————————————————————————————————————————————————————————————– The battle in the narrowbody … Continue reading