The State Audit Office of Latvia has audited the implementation of the recommendations provided in the 2021 audit regarding the state supervision of the investment made in airBaltic during COVID-19 pandemic. Conclusion is that there sufficient actions have not been taken at any of the supervision levels, id est, the Ministry of Transport, the airBaltic Council, the Cabinet of Ministers, which would facilitate the return of the state investment potentially. The Cabinet of Ministers has not established a special procedure for managing the risk of return on investment, as suggested by the State Audit Office of Latvia in 2021. In its turn, the Ministry of Transport has not made significant improvements in the management of the state-owned enterprise. The State Audit Office of Latvia calls on the Cabinet of Ministers to strengthen the supervision of the state-owned shares of airBaltic urgently by transferring possibly it to another ministry or competent institution to mitigate risks to the state budget.
IN BRIEF
- The State Audit Office of Latvia has concluded that the Ministry of Transport, the airBaltic Board, and the Cabinet of Ministers did not take sufficient action to facilitate the return of the state investment potentially. As a result, the State Audit Office of Latvia has recognised the recommendations made in the 2021 audit as not implemented.
- In 2024, the government reduced the share capital by 571 million euros by pointing to preparations for an IPO, but public communication was unclear about the initial plans for recovering the investment.
- In 2020–2022, the government invested 340 million euros in airBaltic by increasing its stake in the company. There was a clear intention to recover the investment, but there was no specific vision ‘how’. AirBaltic’s business plans no longer include such a goal since mid-2023.
- Although the state’s general strategic goal for airBaltic was defined in 2022, the state has not set specific objectives and directions of action by using the promotion of Latvia’s accessibility more as a slogan.
- The Ministry of Transport and the airBaltic Council have not improved the governance of airBaltic significantly and have not ensured the protection of state interests within the company sufficiently.
“The state’s investment in airBaltic was significant, that is, 340 million euros, during the COVID-19 crisis so the investment had to be managed with a clear goal and responsibility from day one. The state had a clear intention to recover the investment initially. However, there was no clarity on how exactly this would happen and on what prerequisites it depended. Unfortunately, there was not sufficient supervision ensured or mechanisms established that would allow the state to protect its interests purposefully and, possibly, recover the investment at any management level of airBaltic. As of mid-2023, airBaltic’s business plans are no longer related to the goal of recovering its investment for the state. This is also evidenced by the state’s actions with the reduction of the share capital, as well as the planned reduction of the stake. Unclear and sometimes contradictory communication about the possible recovery of the state’s investment does not contribute to public trust in the decisions made,” emphasised Mr Mārtiņš Āboliņš, Council Member of the State Audit Office of Latvia.
State support provided during COVID-19 and its recovery
Total investment of Latvia in airBaltic’s share capital amounts to 545 million euros, whereof the state invested a total of 340 million euros in 2020–2022 to mitigate the effects of the COVID-19 crisis, thus increasing the state’s shareholding in the company from 80.05% to 97.97%.
Initially, the state had committed to recovering the 250 million euros allocated to airBaltic in the first stage. It was clearly stated in both official documents and public statements before June 2023. According to the strategy approved by the Cabinet of Ministers in 2021, the recovery of the investment was planned in the initial public offering (IPO) process, in which part of the state-owned shares would be sold by reducing the shareholding to 51%. However, the strategy lacked a specific action plan because it was not specified how and under what conditions the investment would be recovered. It is evidenced by the fact that the approved strategy has not been revised even once despite significant changes including the second wave of the COVID-19 pandemic, Russia’s full-scale invasion of Ukraine, aircraft engine problems and multiple changes to airBaltic’s business plans. Meanwhile, the state invested another 90 million euros in the company.
In August 2024, the government decided to reduce airBaltic’s share capital by 571 million euros, which the company considered a key prerequisite for the successful implementation of its IPO. Following this decision, officials and airBaltic representatives publicly stated without justification that the recovery of the investment had never been planned or emphasised that the state aid had already been repaid through taxes and economic contribution.
The support to airBaltic was provided in accordance with the then-current European Commission Regulation, which resulted in the company being in a “state aid situation”. It meant that airBaltic had to comply with certain restrictions, for example, regarding the remuneration of the Board of Directors. The main objective of the exit from state aid is to reduce the state’s shareholding in the company. However, it is up to Latvia, as the support provider, to decide whether it recovers its COVID-19 funding as a result of this process. Currently, the Temporary Regulation includes other exit mechanisms, including without actually recovering the investment. However, the Cabinet of Ministers has not approved such an exit strategy yet.
Other airlines (e.g., KLM, Finnair, Lufthansa) repaid state investments made during COVID-19 actually, and even ahead of schedule. The State Audit Office of Latvia has not found any example where an airline that received support would exit state support in a manner similar to the exit strategy envisaged by airBaltic currently.
In addition to the European Commission’s terms and conditions, countries were also able to apply stricter conditions. For instance, the Netherlands imposed a 20% reduction in management remuneration compared to 2019 and appointed a state representative (agent) to supervise the use of the funding provided to KLM. Latvia did not impose additional restrictions. Although the public and the government were informed in 2020 about a voluntary 20% salary reduction by airBaltic management at the beginning of the COVID-19 crisis, the audit found that this amount was only withheld temporarily and was paid to the Board of Directors in January 2022 at its initiative.
Insufficient supervision of airBaltic
The State Audit Office of Latvia had called on the Cabinet of Ministers to establish a special procedure for managing the risk of recovering airBaltic’s investment already in 2021. The Cabinet of Ministers did not establish it by continuing supervision under the 2015 regulations. Until December 2024, airBaltic prepared the informative reports on the actual situation to be submitted to the Cabinet of Ministers itself. The informative reports, unless they were related to the need for additional investment, highlighted the positive aspects of airBaltic’s operational activities mostly, without mentioning various risks related to the financial situation. Most of those reports are not available publicly, thus reducing transparency. The supervision by the Cabinet of Ministers was not carried out based on a structured analysis of information on indicators and results that would show progress towards recovering the investment or identify deviations in a timely manner to take corrective measures.
In its turn, the Ministry of Transport has still not established a management system of state-owned enterprises that would ensure the state’s ability to implement the strategic goals of the sector and promote the rational use of resources. The Ministry still does not receive essential information to supervise airBaltic fully (e.g., employee remuneration, capital investments). In the opinion of the State Audit Office, the Ministry of Transport does not respond sufficiently to important information when it does come into its possession. For example, regarding the transactions concluded by airBaltic in 2023, which provided for a significant increase in the fleet. The Ministry does not participate in setting financial and non-financial goals fully.
The State Audit Office of Latvia concludes that the airBaltic Council has not monitored the restrictions on the remuneration of the Board of Directors sufficiently. Although the financial situation was difficult, the remuneration of the Board of Directors increased. Also, bonuses for 2019 were paid to the Board of Directors from the state’s repeated COVID-19 investment in 2022. The State Audit Office of Latvia believes that such action was not in line with the company’s financial situation and the interests of the shareholder. It creates the impression of unjustified waste in crisis. This state support was primarily intended to stabilise airBaltic’s finances.
Business plans change
The review of the implementation of the recommendation found that the tasks of the responsible institutions had not been fulfilled sufficiently purposefully so that the state as a shareholder could monitor airBaltic’s business plans and financial situation in full with the aim of facilitating the recovery of the investment. The strategic alternatives of the state as a shareholder have also not been assessed by leaving complete freedom of action to the Board of Directors of the company.
airBaltic’s business plans have changed significantly in recent years, which was influenced by both external circumstances and the company’s goal of implementing an IPO. The most significant changes to airBaltic’s business plans were made in July 2023 when the latest business plan was approved and the expansion of the fleet was planned. The State Audit Office of Latvia concludes that the new plan and the growth plans included in it are aimed at the successful implementation of the IPO primarily, as the company believes that growth is a prerequisite for financial sustainability and continuity of operations. At the same time, neither the company’s growth directions nor the actual use of the fleet is defined precisely, and these aspects may change depending on the market and external circumstances. The plans are based on a number of assumptions, including about the regional growth, and airBaltic’s stated ambitions are not fully covered by the available funding.
The substantive involvement of the state in the development of business plans is still not fully ensured. In connection with the current business plan, the responsible institutions evaluated and provided an opinion on the plan, which envisaged two possible fleet size scenarios. The airBaltic Board of Directors did not provide them with information on which of these scenarios was chosen and why. The Ministry of Transport requested the most current version of the business plan from the Board of Directors only when it was due to be submitted to the State Audit Office of Latvia.
“The State Audit Office of Latvia considers that the viability of airBaltic’s business plan must be assessed seriously now. The company’s financial situation is complicated that is evidenced by losses both last year and at the beginning of this year, negative equity, and significantly delayed and repeatedly postponed IPO process. There is no longer any talk of the state recovering the invested funds through the IPO. On the contrary, the company indicates the need for additional state funding openly and that the implementation of the IPO is unlikely without the latter. Although the company has grown rapidly and reached the initially planned fleet size, its financial situation has deteriorated. External circumstances are understandable, such as the problems of the engine manufacturer and the war in Ukraine, but there are also visible shortcomings in the company’s own business model at the same time. In our opinion, further investment of state funds in the existing model without assessing its viability and sustainability would be unjustified. We call on the Ministry of Transport, the company’s Council and the Cabinet of Ministers to seek rational and economically justified alternatives for the company’s further development,” indicated Mr Mārtiņš Āboliņš, Council Member of the State Audit Office of Latvia.
airBaltic’s overall strategic goal
In November 2022, the state defined for the first time what it intended to achieve with its shareholding in airBaltic, or the airline’s overall strategic goal. This involves promoting Latvia’s international accessibility by ensuring passenger and cargo air transportation. The Ministry of Transport has not drafted a letter of expectations detailing this goal at the same time.
Promoting Latvia’s accessibility serves more as a slogan than a clear state vision of by what and how often we should be accessible and under what conditions of profitability. As a result, airBaltic does not take into account potential risks in its growth plans sufficiently that may affect the preservation of the value of the state’s investment, and the state does not require this. So far, the state has acted more like a ‘wallet to draw from’ than a sufficiently qualified and demanding owner of a state-owned enterprise.
Additional reading – interim audit report summary.
Some information in the public version of the interim audit report has been redacted based on the request of Air Baltic Corporation AS to designate it as restricted access to protect commercially sensitive information.
About the State Audit Office of Latvia
The State Audit Office of the Republic of Latvia is an independent, collegial supreme audit institution. The purpose of its activity is to find out whether the actions with the financial means and property of a public entity are legal, correct, useful and in line with public interests, as well as to provide recommendations for the elimination of discovered irregularities. The State Audit Office conducts audits in accordance with the International Standards of Supreme Audit Institutions of the International Organization of Supreme Audit Institutions INTOSAI (ISSAI), the recognition of which in Latvia is determined by the Auditor General. Upon discovering deficiencies, the State Audit Office of Latvia provides recommendations on resolving these issues and informs law enforcement authorities about any potential infringements of the law.
Additional information
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