ROUTES EUROPE: Winds of Change at Estonian Air

Richard Maslen spoke to Tero Taskila, the chief executive officer of Estonian Air, as he embarks on a mission to get one of Europe’s smallest flag carriers recognised as an alternative network airline.

The past two years have probably included the most pivotal 12-month period in the short 21-year history of Estonian Air. A revised management team appointed in 2011 has ripped up the copy book and started afresh, pointing the venture in a completely new direction with a revised network strategy served with a completely new fleet of aircraft. Almost 20 years of heritage based on a point-to-point regional business operation has been dropped in favour of a fresh new identity and revised network carrier model based around feeding transfer traffic between Western Europe and markets in Eastern Europe, Russia, the Nordic region and the Commonwealth of Independent States (CIS).

Estonian Air was formed from the former Estonian directorate of Soviet airline giant Aeroflot in 1991 and formally launched operations as an independent venture on December 1 the same year, initially serving the Tallinn – Frankfurt route using Tupolev Tu-134 jets. Over the subsequent two decades it has become a real niche player in the market, predominantly serving the needs of the local population, only a limited market when compared with its competitors across the Continent. It has also suffered from a number of changes in ownership as the state venture was privatised but has subsequently almost entirely returned to full government control.

The end of the 2000s was tough time for all airlines and the Baltic market was hit particularly hard. With Estonian Air’s passengers numbers falling by around a quarter in 2009, increased competition from budget operators impacting yields and concerns over the airline’s long term sustainability, the Estonian Government took action in 2010, increasing its shareholding in the company from 51 per cent to 90 per cent in a move to full state control by diluting the ownership of SAS Scandinavian Airlines from 49 per cent to just 10 per cent (it is likely to acquire full ownership by 2014 having already committed to increase its stake above 97 per cent). Now under the tutorage of Tero Taskila, a former Finnair and airBaltic executive, the airline is looking to overturn its troubled upbringing and celebrate its coming of age this December by establishing itself as one of the continent’s fastest growing network carriers.

“When I joined the company I had this view from the outside that it was a very old fashioned business that had become stuck in the past, but I was surprised upon my arrival because the airline actually had a lot of bright and innovative employees,” Tero Taskila told Routes News.

“I was lucky to inherit a good team but I have had to change the way the company is doing business and develop a common vision. The major issue was that the staff had great ideas but they were split into their own individual silos and nobody really interacted internally between departments,” he added.

With the initial internal communication problems resolved the next main issue was develop a sustainable business model that was no so reliant upon the local market. According to Taskila, with a number of different owners all having their own outlook, the airline’s business strategy was for a number of years based on a general consensus that supported their collective ambitions, a limited point-to-point network. However, as the below table shows there are only a limited number of markets from Estonia that can be sustained with significant O&D flows.

Estonia currently has an estimated population of 1.2 million people and economic forecasts predict that number to only rise to 1.3 million by 2050. “Our home market is relatively small and that needs to be compensated with network flow. The country is really on the edge of the world, in the corner of Europe, but, in one way, that affords the opportunity to develop something new,” explained Taskila. “In one of my first meetings at the airline I offered a global map with Tallinn in the centre of the world and told everybody that was the basis for the airline’s new vision. ‘Let’s now look at what are the opportunities in our extended markets like Scandinavia and the wider Baltic region, where we can use the excellent geographical position of Tallinn and develop something exciting for the future,’ I told them.”

The dynamics of the new business model has also been driven forward by a new economic outlook within Estonia, according to Taskila. The country is going through a major educational change with a workforce that is moving away from traditional factory and cleaning jobs to skilled roles and it is now one of the strongest economies in Europe. “Estonia is now developing a knowledge based economy selling intelligence rather than low-cost labour and these people require global connections,” the Estonian Air chief noted.

The airline is aiming to deliver this by expanding its network and adding frequencies on key routes to enhance network traffic between Western Europe and markets in Eastern Europe, the Nordic region, Russia and the CIS. The sheer scale of this change is clearly visible when you look at the connection options for passengers via the airline’s Tallinn hub. During the last summer schedule, Estonian Air offered just 49 different flight options, however since March this year it has been providing 440 itineraries to the travelling public.

Estonian Air’s new strategy appears to be bearing fruit. In the first three months of 2012 the airline carried 139,063 passengers, up 15.7 per cent on the first quarter of 2011, while looking at just March 2012 the figure was up 22.3 per cent compared with last year. And, the airline’s own growth is once again driving passenger development at its Tallinn Airport hub with March 2012 the first month in four years that Estonian Air’s own traffic growth exceeding that of the airport average (19.3 per cent). The flag carrier now accounts for around 38 per cent of the traffic at Tallinn.

It is currently a little early to see what scale the network model adopted at the start of the Northern Summer schedules in March 2012 will drive passenger growth. However, according to Taskila, advanced summer ticket sales during the first quarter of this year were up an enormous 350 per cent compared with the same three months of 2011 so the outlook is positive.

But, how is Estonian Air achieving these results and how has it been able to revise its strategy so quickly? Well, a new fleet programme has been the main factor behind this and the replacement of its older Boeing 737 jets, which were reaching the end of their leases, with modern regional jets from the Embraer E-Jet family. “We are seemingly moving in the opposite direction to the rest of the aviation market,” noted Takila. “Right now everybody wants to consolidate; are looking at mergers, or are introducing larger capacity aircraft to lower unit costs. “We have instead developed a model of right-sizing to optimise trip costs and enable us to increase frequency in an effective manner.”

The first stage of the fleet renewal has seen the arrival of four E170s over the past couple of months on lease from Finnair and these will be joined by three larger E175s and a single E190 direct from the Brazilian manufacturer from early 2014. These will initially operate alongside its Bombardier CRJ900s but Taskila acknowledged that the carrier is “looking to replace the CRJ900s whenever it is convenient from a financial perspective”.

“The E-Jet Family concept gives us a lot of flexibility. In a network model when you don’t have huge demand and are only a small operator you need as much flexibility as possible. We will always have some routes with low and seasonal demand and others with a strong year-round performance and the mix of 76-seat up to 125-seat aircraft operated with the same pilots and supported by the same engineers enables us to meet this without major cost disadvantages,” said Taskila.

Alongside its previously announced commitments, Taskila confirmed that Estonian Air is seeking to add an additional eight E-Jet aircraft on lease deals and it has already engaged the market to source these aircraft from leasing specialists. “We are looking at deliveries from next year up until 2016,” he explained. “Our focus is on the E190 but we are also evaluating if the E195 would be better for us. If we do commit to the largest variant I think we will become the first airline in the world to operate all four E-Jet versions.”

Alongside its mainline operation, Estonian Air also has a wholly-owned subsidiary operation, Estonian Air Regional, which operates a small fleet of three 33-seat Saab 340 turboprops on short-distance routes. “We are currently exploring where the airline now stands in our wider strategy,” acknowledged Taskila. “Do we merge the venture into the mainline operation or do we retain it as a separate business? It does have its own Air Operators Certificate and traffic rights so there are benefits associated with that and we could develop it as a feeder carrier offering high frequency, low-cost regional services on some routes.”

What is certain is that the airline will replace the Saab 340s with larger and more economical 70-seat turboprops, possibly as soon as the last quarter of this year. According to Taskila a decision between purchasing either ATR 72 or Bombardier Dash 8-Q400 equipment will be made in the coming months with an initial order for four firm aircraft and additional purchase rights or options anticipated. “Routes Europe may come too soon for this announcement but we will certainly make the decision by the end of the summer,” explained Taskila, “and if we are lucky with aircraft availability we could begin the transition at the end of this year, although summer 2013 is the plan.”

Under its development programme Estonian Air expects to double traffic by 2015, but with two or three new aircraft joining its fleet every year where will these new aircraft fly? The airline has already expanded its network to 24 destinations across CIS, Scandinavia and Europe with new destinations coming online this summer including Helsinki, Riga, Jyväskylä, Hannover, Vienna, Venice, Joensuu, Kajaani and Tbilisi. “To grow in Western Europe we need to look at markets behind Tallinn,” explained Taskila, “so our main focus at the current stage will be develop our network in the CIS and Nordic countries and build our extended market.”

The Russian market in particular is growing, but Taskila acknowledged that this may not be just down to Estonian Air’s own onboard product and services or fare incentives, but interestingly down to one of its competitors, budget carrier Ryanair. “We are actually seeing a situation where the low-cost carrier is actually stimulating our own demand,” revealed Taskila. “We are seeing a lot of Russians flying into Tallinn on our own flights and then catching a Ryanair service into Western Europe.”

With a major fleet renewal programme and an expanded network strategy, surely it will only be time before Estonian Air looks to strengthen existing codeshare and interline partnerships and become part of one of the world’s global alliances. Although Scandinavian venture SAS retains a single seat on the carrier’s management board it has no influence over Estonian Air’s business strategy and it is therefore not restricted to maintaining relationships solely with Star Alliance partners. However, Taskila feels that the airline has more to gain by remaining an independent entity. “We don’t actually have any interest in alliances at the moment. We feel there is more to gain by remaining a small independent regional airline. This has enabled us to develop good cooperation with major airline partners across all three groupings and we feel these relationships should remain loose so we can maintain our development.”

Taskila’s arrival at Estonian Air on July 1, 2011 and his ambitious new strategy may have come too soon to return the carrier to profitability last year, but its €17.3 million loss was the lowest of any IATA carrier in the Baltic and Nordic region. “This was still not acceptable,” acknowledged Taskila, but he believes the airline is well-placed to return to profitability within the next two years.

“I believe, it is the team’s experience and skills that decide whether the company has a chance to survive or not. Estonian Air improved its run towards the end of last year. Not only were we the fastest growing airline in Europe, we also witnessed the highest ever customer satisfaction, load factors and punctuality during the last four months of the Financial Year 2011,” he said. Only time will tell if the airline’s revised strategy will be successful. The initial signs are good, but in the ever-changing aviation world, you never know how the wind will change in the future!

This story appears in the latest issue of Routes News. A copy of the latest issue of the world air service development magazine is available to all delegates at Routes Europe.