Operational monitoring of airBaltic must be strengthened to ensure its successful recovery from the crisis


The State Audit Office audited the solidity and actual spending of the requests for additional funds allocated to the Ministry of Transport for the elimination of the consequences of COVID-19. Last year, it accounted for a quarter of all funding allocated to curb Covid-19 or almost 306 million euros. The national airline JSC Air Baltic Corporation (airBaltic) received the largest funding of 250 million euros. Having assessed the context for the aviation sector in early 2020, the State Audit Office acknowledged that state aid in the COVID-19 crisis could be considered an investment to the national interest, on which the government took a political decision. The funding was needed for airBaltic to overcome the crisis and successfully survive the post-crisis situation without state support when the global aviation industry was facing enormous difficulties. At the same time, the State Audit Office outlines after the audit the need to strengthen shareholder and government supervision of the airline operations to achieve the funding target and work stably after the crisis and the state to recover the investment within five to seven years. Such non-standard crisis financing also requires special crisis monitoring of the return of the allocated funding.

The Covid-19 crisis hit the aviation industry particularly hard. To limit the spread of COVID-19, the Cabinet of Ministers decided within a week after the declaration of the state of emergency, already on 17 March 2020, to abolish international passenger transport through airports, except for passenger transport by state aircraft and military transport. Other countries also imposed flight restrictions, which harmed the aviation industry worldwide.

Funding for mitigating the consequences of COVID-19 and overcoming it (305,912,210 euros) in the aviation sector by the decisions of the Cabinet of Ministers in 2020 was channelled operatively to increase the share capital of three state-owned enterprises – SJSC “Latvijas gaisa satiksme” (Latvian Air Traffic - LGS), airBaltic, and Riga International Airport. The State Audit Office assessed the solidity of the requests for financing granted to the first two state-owned enterprises during the audit. Riga Airport did not receive the planned support in 2020 yet, as it was not coordinated with the European Commission.

The decision to provide support was considered at several meetings of the Cabinet of Ministers, and the approval of the European Commission was received. The 250 million euros allocated for the share capital increase of airBaltic to compensate for the losses caused by COVID-19, ensure the long-term liquidity of the enterprise, and overcome the economic crisis and stabilize the situation in the sector as a whole. LGS received six million euros for an increase in share capital to help overcome the financial crisis and stabilize the economic situation in the industry.

The amount of the required increase in share capital was calculated by forecasting the amount of losses, without indicating exactly for what measures or for covering which expenses the funds were granted. Therefore, the State Audit Office concludes that public funds were primarily intended to enable state-owned enterprises in the aviation sector to continue their operations. On the other hand, assessing whether the public investment has paid off will be possible only in the long term. It will be achieved if the state-owned enterprises in the aviation sector continue their operations, the COVID-19 crisis is overcome, and the situation in the industry stabilizes, as well as the state recovers the investment of 250 million euros within the set term.

Support or air Baltic or what if COVID-19 did not appear…

The analysis of the operational, financial data for 2020 shows that the support for the continuation of airBaltic operations was necessary and justified. The company’s financial situation in 2020 was even worse than forecasted in May - the losses were higher than the forecasted 252.7 million euros. Compared to 2019, the amount of revenue has decreased by 71%.

When deciding to increase the share capital of airBaltic, the Cabinet of Ministers was informed about the company’s economic and financial indicators and the actual situation. Among other things, the bond issue commitments in 2019 actually limited other possible financing options for the company, such as loans or other temporary state aid measures in 2020. Therefore, the government’s choice was rather limited. In this situation, the Latvian government made a political decision to support the national airline.

Although the need for support is justified only with the consequences of the COVID-19 crisis, the auditors conclude that even before the COVID-19 pandemic, financial independence of airBaltic, or equity, has been low and has been declining in recent years. Therefore, one cannot rule out that an investment in fixed capital of airBaltic would be necessary even if the world did not face the COVID-19 pandemic.

The decision of the European Commission sets out the terms and conditions for airBaltic receiving state aid. They involve the recovery of 250 million euro investment for five to seven years and additional action if the required steps to recover the public investment will not be taken after seven years.

However, the government must submit a strategy to the European Commission to reduce the state’s shareholding in airBaltic within 12 months of the support being granted, that is, by August 2021. This strategy should include a plan for the continuation of airBaltic operations and the use of public funds, a schedule for reimbursement and repayment of the public investment, and the measures that airBaltic and the state will take to comply with the repayment schedule.

With the decision to increase the share capital of airBaltic, the shares held by the Republic of Latvia have risen from 80.05% to 96.14%, while the second shareholder Mr Lars Thuesen - with AIRCRAFT LEASING 1 Ltd totally owned by him holds 3.86%.

Strengthening the supervision of the recovery of the 250 million euros investment is required

When assessing the governance system of state-owned enterprises established by the Ministry of Transport, the State Audit Office must conclude that one must strengthen the supervision of fulfilling the conditions of the provided state aid. The airBaltic performance monitoring system established by the Ministry of Transport can be improved by ensuring compliance with the laws and regulations in force. The Ministry of Transport does not participate in setting the deliverables fully but only in their evaluation post-factum by relying on the information provided by the management of airBaltic. Thus, the ability of the state as a shareholder to implement its strategic goals, for the achievement of which investments have been made in the state-owned enterprise, has been reduced.

In addition, the State Audit Office considers that the content of the information provided to the public on airBaltic not only highlighting the positive aspects of its operations but also informing comprehensively about the financial position of the state-owned enterprise, the planned benefits from the investment, as well as the related risks, should be improved.

Taking into account the significant impact of public investment in the share capital of airBaltic on the state budget and the economy as a whole, the Cabinet of Ministers should elaborate special procedures for risk management of public investment recovery, including a monitoring mechanism for decision-making, objectives, and results, deadlines, and officials in charge. At the same time, not reducing the responsibility of the Board and Council of the state-owned enterprise through governance measures is crucial.

LGS reckoned with the worst-case scenario, but the actual situation turned out to be better                                                                                      

After auditing the allocation of additional funding to LGS, the State Audit Office has concluded that LGS based its request for an increase in share capital on the most pessimistic scenario of expected developments and estimated in March 2020 that it would require additional financial resources of six million euros by the end of 2020. Yet, the company’s actual cash flow turned out to be better than originally planned. At the end of 2020, the LGS cash balance was 9.6 million euros. The auditors conclude that cost recovery in LGS was possible at its own expense without the six million euros invested in its share capital. Still, one could not have predicted it accurately when the state of emergency was declared. LGS plans to spend the allocated funding in 2021 to ensure the fulfillment of tasks essential for the state and its security.

The audit findings have been submitted to the Chair of the Public Expenditure and Audit Commission of the Saeima and the Prime Minister. A letter signed by the Auditor General has been sent to the Minister of Transport regarding the audit conclusions and recommendations.