The Failure of Estonian Air : Flying Away with Taxpayer Money

Why Small Governments Should Not Run Airlines

 

Estonian Air's Tupolev Tu-134a. Photo taken back when they last made a profit. [Photo Credit]

Estonian Air is dead, long live the Taxpayer!

Based on the recent ruling by the European Commission, the near-constant handouts to the company by the Estonian government are illegal, and must be paid back. Estonian Air simply doesn't have the cash to pay it back.

How much money is involved? By some accounts, over 130 million euros of taxpayer money was supplied to Estonian Air in the form of equity and debt (loans that will never be paid back). That would be like if every man, woman, child, and rullnok in Estonia took a 100-euro banknote and burned it.

Trondheim, population 180,000. Estonian Air flies here. Popular with lutefisk-seeking tourists. All five of them.

What Went Wrong

Is there one particular bad decision that caused all these problems? Is Estonian Air the next Emirates or Singapore Air, and just needs one or two small changes to become profitable?

Blame the Planes!

It must have been the planes! Too big? Too small? Too many? Well it turns out, they tried them all.

They tried standardizing on an all Boeing 737 fleet, and realized it's hard to sell all the seats in such a big plane.

Then they got rid of those and moved to all Embraer jets, which are smaller and easier to sell all the seats.

Well it turned out those planes used too much fuel, so then they moved to all Bombardier jets.

They basically tried numerous types of planes, and nothing seemed to work. Must not be the planes that are the problem then.

It's the Management, Stupid!

Bad management?  It must have been the CEO's fault! Who was that incompetent person who doesn't know an an aileron from a wing flap?!

Well, it turns out they went through 3 different CEOs the last few years (Aljas, Taskila, Palmer), and that didn't help either. Must not be management then.

Joensuu, population 59,000. Estonian Air flew here. A popular destination for tourists who like to ride bikes on snowy sidewalks.

They Fly to the Wrong Places!

Big cities? They tried that then cancelled all flights to places like Frankfurt, London, and Dublin.

Small cities? They launched flights to places like Joensuu, Kajaani, and Tbilisi  (no, we're not making this up, they really flew there). That didn't work either -- the Kajaani flights consisted of one or two sex tourists, and the Georgians didn't like the 4am flight and a layover in Tallinn when connecting to their onwards destination.

Vacation cities? Also tried -- Dubrovnik, Simferopol, and Athens were all cancelled shortly after they started, since most Estonians book package tours on charter flights.

Transit hub for passengers coming from Asia? Agreements were signed with some Asian countries, and nothing ever happened, perhaps because Finnair already does exactly this in Helsinki.

London, population 8.5 million. Estonian Air cancelled flights due to lack of interest. Everyone wanted to go to Kajaani to meet the sex tourists instead.

 

Let's Be the Nation's Bicycle!

(You know the girl who is referred to as the village bicycle? That's because everyone has had a ride!)

"Coffee, Tea, or... wet lease?"

Estonian Air's most recent strategy is to whore out their planes and crew to the highest bidder, known as wet leasing in the airline industry. They basically operate flights on routes contracted by governments in other countries. These are typically flights to small cities, and they get paid directly by the government to operate the flights, on routes like Copenhagen-Orebro in Denmark, Arvidsjaur-Gallivare in Sweden, and Amsterdam-Vaxjo.

Not only is the airplane prostitution strategy not doing any good, but what is the use of an Estonian national airline if they are just flying domestic routes in other countries?

Destination : Failure

Estonian Air has not turned an annual profit in over a decade.  During this time, they've tried everything -- changing planes, changing CEOs, changing route structures, and even selling their hot plane ass on the airport tarmacs of Arvidsjaur.

Nothing worked. They've tried everything, and it failed. We think there is a structural problem -- the Estonian market is simply too small for a national airline.

 

Moving Forward

It's time to stop the madness. This government-owned airline hobby has cost the Estonian taxpayer 130 million euros. Meanwhile, the Estonian government, foreseeing the fate of Estonian Air, has already set up a new taxpayer-funded airline known as Nordic Aviation Group, and set aside 41 million euros of taxpayer money to fund them.

Supporters of this move will say it's necessary to ensure Estonia has good air connections to other cities. We agree that air connections are vital, but Estonian Air has already proven they can't provide air connections to major European cities like Frankfurt and London. Instead, foreign airlines have stepped in to fill the gap, and they've done a good job. Overall passenger traffic at Tallinn Airport has grown by over 100% in the last decade, meanwhile Estonian Air's share of passenger traffic at the airport went down from 55% to 27% during that same period. At the same time, Latvian carrier Air Baltic has announced plans to operate direct flights from Tallinn to 11 other European cities -- many of the same cities Estonian Air offers direct flights to.

Yes, we're sad to see Estonian Air go. We've been flying them for years, even during their days of the rickety Saab planes operated by the Estonian Air Regional spin-off, and have taken the legendary twice-daily London flights that made it possible to fly to London in the morning for meetings, and fly back the same evening (and head directly to Decolte from the airport). Nonetheless, just like Decolte, it's time to shut it down and move on. There are better uses for 41 million euros. How about ensuring all children have access to nursery school?

 

Best Estonian Air ad ever. 

.ee Bubble Receives Funding from Enterprise Estonia

.ee Bubble and EAS Announce Project to Create an Incubator for Incubators

FOR IMMEDIATE RELEASE

Tallinn, Estonia, 1 April 2015. The .ee Bubble and Enterprise Estonia (EAS) are pleased to announce a new collaboration project. EAS will provide 2 million euros in funding to the Bubble, to start an Incubator for Incubators. The new incubator for incubators will focus on providing services and training to help new incubators in Estonia get started.

"We were doing an analysis of incubators in Estonia, and found that there is a 1-to-1 ratio of taxpayer-funded incubators to startup companies." said the .ee Bubble. "We thought this was way too high, and reported our findings to EAS. You know what they told us? They said it was too low and they wanted more incubators!"

"In Estonia, we need more incubators." said Andrus Mullisepp, chairman of the board of EAS. "Other than the Räpina Incubation Center, Viljandi Creative Incubator, Startup WiseGuys, GameFounders, Tallinn Tehnopol, Tallinn Creative Incubator, EBS Business Incubator, Roosna-Alliku Incubator, Mäo Incubator, Narva Eagle Nest Incubator, Läänemaa Incubator, Sillamäe Free Zone Incubator, Startup Estonia, Founder Institute, Võrumaa Technology Incubator, Tallinn Incubator, Ülemiste Incubator, Kopli Incubator, BuildIT, Mektory, Prototron, European Innovation Academy, Start Smart, SummerCamp4Startups, Startup Garage, Ideelabor, Protolab, Biomed Incubator, Seiku Social Entrepreneurship Incubator, Ajujaht, Tartu Creative Incubator, Tartu Science Park, and the Pärnu Incubator, we really don't have that many incubators in Estonia. For example, let's say you live in Abja-Paluoja and have started a new online dating service -- Tinder for Inbreeds, if you will. You'd have to drive all the way to Pärnu to find the nearest incubator. That's a 20-minute drive if it's a busy day!"

On the reason for the funding, the .ee Bubble said, "Look, we really don't know why they gave us money. We thought they hated us! We heard there were only two proposals they received, one was from us and the other was written by a bunch of monkeys randomly typing on their computers. They were going to give the contract to the monkeys, but there's some EU regulation against awarding contracts to circus animals."

When it was pointed out to EAS that places like Silicon Valley have a much lower startup-to-incubator ratio, and none of those incubators receive taxpayer funding, Mullisepp from EAS said: "I'm tired of everyone comparing great Estonia that that economic wasteland that is Silicon Valley. Other than Facebook, Google, Apple, Oracle, Intel, Cisco, Twitter, Uber, eBay, Paypal, and Adobe, what has Silicon Valley provided to the world? In Estonia, we have amazing innovative companies like Fits.Me, United Dogs and Cats, and Jobbatical!"

When asked why EAS is giving 2 million euros to the .ee Bubble for this project, Mullisepp said: "Actually, 2 million euros isn't that much if you think.... ahh.. it appears I've just been asked to resign because my wife's brother's company got funding from EAS last year. You'll have to ask my successor about that."

Jaanus Mullitaja, the new chairman of EAS, continued: "Two million euros isn't that much, if you consider how much we've been giving to the incubators themselves. We gave 2.7 million euros to just the incubators in smaller cities in Estonia, and you can see how well that's working out. The Roosna-Alliku incubator doesn't even have a webpage! I'd also like to add that... ahh... it seems I'm being asked to resign because my consulting company received funding from EAS last week."

Tarmo Mullipää, the third new chairman of EAS in the last hour, added: "We think incubators are the key to success for startups in Estonia. Our goal is that every startup will go through at least three incubators, and we'll have incubators in every city and village in Estonia. Ideally, startups will just permanently remain in incubators and never actually start doing business."

When asked about when the startups will start making money, Mullipää said: "Look, do you really think we care about profit? Hell, we gave a few hundred thousand euros to some rich British pop singer so he could make a DVD of his concert and keep all the revenues. The way we consider our efforts a success is if we've given away all the taxpayer money that was given to us."

Mullipää was also questioned about his qualifications to be chairman of EAS and he responded: "It's quite simple actually. Nearly everyone in Estonia has either received money from EAS, or has a friend or relative who received money, so that disqualifies them from being on the EAS board. I, on the other hand, am an orphan, virgin, childless, and I have no friends and no relatives. I'm perfectly qualified for the job because I have no conflicts of interest. Now if you'll excuse me, I need to go take my hourly dosage of antidepressants."

Estonia's president, Toomas Hendrik Ilves also had good words to say about the new project, in this exclusive interview:

Interviewer: Mr. Ilves, what do you think of today's announcement?

President Ilves: Today is a great day for glorious Estonia! [Ilves pauses to tweet] I've always said that we need more [another tweet] incubators, and today we have [1 tweet, 2 retweets] the solution. An incubator for incubators [tweet, tweet, tweet].

Interviewer: How do you think this will help startup companies?

President Ilves: The reason it's good is that [tweet] [tweet] [retweet].. hey, I have some important work to do right now. I'm in a Twitter flame-war with two 12 year old boys in Chelyabinsk who are not convinced that Estonia is the greatest nation on earth. It's my job as president to convince them otherwise. My wife, First Lady Evelin Ilves is right here [tweet] [tweet]. You can talk to her.

Interviewer: Good day, Mrs. Ilves. It was quite an announcement today. Can you tell us what you think of Yoga...

First Lady Ilves: What!?!! I was told there would be no questions about my personal life! I go to yoga twice a day as a hobby! I don't meet any swarthy men there, and I'm definitely not kissing them! How dare you ask such a question! [storms off]

Interviewer: Ahh... I was just just asking your opinion on Yoga Intelligence, the startup that closed up then reopened under a similar name to avoid their tax debt.

An incubator for incubators has not been tried before, and the .ee Bubble provided more information on this novel concept: "This will be like a teach the teachers program. We'll teach our courses to incubators, and they can teach this to the startups in their incubator."

An initial course listing has also been provided:

• Government Funding in a Matter of Minutes. How to use your Estonian ID card to create a company in 20 minutes, then apply for EAS funding on the 21st minute.
• Techniques for Auditor Seduction. Your biggest enemy is the EAS auditor who wants to see how you're spending their money. This course will provide seduction techniques so the auditor's attention will be focused on something other than numbers. Special sessions in how to give compliments how to buy flowers will be provided.
• How to Get Government Money from Two Governments at Once: A case study of Publification.
• Time Management : How to Attend as Many Startup Networking Events as Possible and Still Have Time to Sleep. A good Estonian startup founder should be spending 80% of their waking hours at startup networking events, so they can meet the same people over and over and talk about "working together". This course will provide effective methods for time management and how to avoid double-booking.
• How to Siphon Money through an Estonian Company, Never Pay Taxes and Have the Government Still Love You. A case study of ComPlus Consulting.
• Techniques for Being a Small Five-Person Company and Still Getting Millions in Taxpayer Money. A case study of Meratel
• Choosing Your Next Incubator. Techniques for choosing which incubator to move to next. This course will show how to evaluate if the weekend social events are good, how much free food and drink is provided, and also provide tips for determining if the people who run the incubator are single and promiscuous.

Commenting on the budget, the .ee Bubble said: "It may seem like 2 million euros is a lot of money, but really it's not. We plan to run things like our idol, the taxpayer-funded Estonian Development Fund (Eesti Arengufond), so we'll need to get the most expensive office space in Tallinn. We'll also spend lavishly on alcohol. In addition, we've set aside 10% of our budget for hookers and blow.

Summarizing the project, Mullipää of EAS said: "We hope this will be the beginning of a great cooperation project with the .ee Bubble. If things go well, then our next project with them will be Mullimaa. It's an amusement park for startups, kind of like taxpayer-funded Lottemaa, but each of the "rides" will just be a government-funded incubator where startups can sit down and receive taxpayer money. We'll also have rides for the taxpayer. They can come and sit in a locked cage for 8 hours and watch all the fun everyone else is having with their money!"

Oh, and April Fool's!

Meratel : MagicSIM or MagicSCAM?

Our Adventures with the #EstonianMafia

Like a TV reality show in its third season, it's time for something different. This time, instead of talking about the taxpayer money last, we're going to get to that first:

Whenever it starts with "The project of", you know it's going to be good.
 



That's right, 2,360,500 euros of taxpayer money to a company called Meratel for a "MagicSIM" project.

Ever heard of them? We haven't either. But for a company to receive this much money, they must be a big company with lots of employees, doing life-changing work.

Who is this great Meratel, with magic powers to take millions in taxpayer money? Information on their website was scarce. We had to know more. Time for a roadtrip!

Taking the Road Less Traveled

Records show Meratel is located in the Mustamäe section of Tallinn, so it was time to pay them a visit. Our first task was to figure out how to get there from our secretive lair under a bridge in central Tallinn (that's where trolls live, right?).

We decided to take a taxi, and now we were faced with a tough decision. Which taxpayer-funded taxi company should we take?

We thought of taking TaxiPal, recipient of 48,731 euros of taxpayer money, but got concerned about if they were still in business. Their founder seems to be employed as IT manager at Eesti Loto for the last four years.

Then we thought we'd try Taxify, recipient of 8,780 euros of taxpayer money, but we were worried reports of their EstonianMafia-style tactics might have rubbed off on their drivers, and we weren't in the mood for a battle.

Finally, we settled on the latest upstart in the taxi business, Pedobeartakso:

No taxpayer funding here!



Our ride arrived promptly, and the driver was nice enough to share his vodka with us on the ride over to Meratel. He did rush off rather quickly after he dropped us off though -- something about needing to head to the playground.

Our Visit to Meratel

We were overwhelmed with excitement. Finally, we get to visit the headquarters of Meratel, the recipients of millions in taxpayer money, and learn about their cutting-edge "MagicSIM" technology! Could this be the cure for cancer?

World headquarters of Meratel located within.



We rushed into the building, and headed straight for their offices... only to find the door locked and no one there:

Yes, we actually did visit their offices. And yes, this really was the highlight of our week.



How could this be? Surely a company that has received this much funding to develop the "MagicSIM" project would be operating on full throttle. We envisioned a lab full of engineers, laboring from morning until late in the night on the "MagicSIM." Instead, we got an empty office.

We quickly pulled out a copy of their annual financial reports, graciously provided to us by one of our readers (who is also big in the Estonian startup community -- see not all of you hate us!). Finally we had our answer -- according to their annual report, the company has only 5 employees! We must have showed up when all 5 of them were out for coffee.

We had to know more. Through careful research (ok, reading the fire escape plan that also shows building layout), we worked out they have approximately 100 square meters of office space. Not much for a company working with millions of euros.

Fifty Shades of EAS Auditors

Now we were a bit depressed, and not only because of the crappy weather. Our hopes were dashed. Meratel was actually a tiny company, that appears to take a lot of coffee breaks. No one was busy using "MagicSIM" to cure cancer.

So what happened? Here's our theory: Meratel is a telecom company, and a lot of the money they received from the taxpayer was used to purchase specialized telecom equipment (according to their 2013 annual report) -- over 1 million euros worth of it.

What does telecom equipment look like? There's the rub. This is all very specialized stuff, and only a few people will know what it is by looking at it.

Now, we don't know if Enterprise Estonia did an audit, but let's say they did. Here's what may have happened.

EAS Auditor (like most auditors, she's a single female in her 20's, from a small town in Estonia): Hi, I'm from EAS and I'm here to do an audit. According to my files, you spent 1 million euros to buy 20 Ericsson DSLAM-VOIP-THINGAMAJIG-2001 devices. Can you show me where those are so I can be sure you received them and are using them?

Meratel Guy (also a younger guy and somewhat handsome, as confirmed by a female we had doing surveillance near their offices, and no we're not kidding about this): Ehh yes.. of course... here they are [points to empty Aura 1-liter juice box on floor]... oh and did I mention how beautiful you are? Those thick glasses make your eyes look lovely. Where are you from?

EAS Auditor: [blushing] Oh, why thank you. No one has ever said something so nice to me like that before. I'm from Abja-Paluoja [tiny town of 2,000 people but with a local government with roughly as many staff as the entire Maltese government].

Meratel Guy: [blank stare] Yes.. Abja-Paluoja. They say the most beautiful women in Estonia come from there. Hey, let's skip this whole messy audit thing. How would you like to go have a coffee with me? We might even see the other 4 people in the company while we're there.

EAS Auditor: Sure! This audit doesn't matter anyway. At Enterprise Estonia, the goal is to give out as much money as possible, not to take it back, so the audits are mostly for show in case the European Commission catches us.

Now did it really happen this way? Probably not -- there are no beautiful women from Abja-Paluoja. What it does show is it can be difficult to audit projects where complex technology is involved, because no one really knows what an Ericsson DSLAM-VOIP-THINGAMAJIG-2001 device looks like, or even how to count them. Could it be that Meratel just bought fancy equipment, then sold it off? More on that later.

"MagicSIM" Saving the World, One Taxpayer at a Time

Who cares how they used the money though. The goal here was to develop the great "MagicSIM" and save the world, right? That project was funded back in 2011. What happened since then?

The project must have been a success, because then in 2013, Enterprise Estonia gives Meratel more money. Apparently 2.3 million euros was not enough for a 5-person company:

Throwing good money after bad?



Meratel got another 189,000 euros of taxpayer money, this time for product marketing for their "MagicSIM". We can only assume the "MagicSIM" was ready for the market, since they were ready to take taxpayer money to market it.

So let's have a look at what all this money bought, marketing-wise. Here is the only information on the great "MagicSIM":

What 189,000 euros of marketing budget gets you



Yes, that's right -- one webpage and a slogan, "Everywhere like at home" that's not even in proper English! This company is definitely going to be a winner!

Does the man in the image look familiar? He should -- it's a stock image that can be found on websites like this one, this one, this one, this one and about 100 other websites. We guess there wasn't enough money left from the 189,000 euros to pay a real photographer.

EstonianMafia at Work

In our opinion, "MagicSIM" was a big scam. Millions of euros to a tiny company, that seems to have produced little from the project.

How did they do it? It's complicated. We haven't figured it all out, but here's what we figured out so far. If you get bored easily, skip to the next section.

For the type of projects they received funding from Enterprise Estonia, there is a requirement that 50% of the funding come from other sources, and typically this funding comes from the company itself. Meratel is a small company, so it would be difficult for them to come up with funding equal to about 3 times their annual revenue at the time.

Instead, they did two things. First, they got around 970,000 euros from a Swiss company called Rudsteff. There's little information on this company, but it looks like at the time, Dimitry Ivanov was a board member at Rudsteff.

Then, they got about 5 million euros from an Estonian company Vivex. The board members are the same two board members as Meratel, plus one more: Andrey Ivanov. Notice the similarity in last names?

Vivex appears to be just a shell company, so to get the 5 million euros to give to Meratel, they got a 5 million euro, 10-year 0% loan from Optiroam, a Hong Kong company. The CEO of Optiroam is Andrey Ivanov.

That tells us how they got money into Meratel, so that Meratel could get money from Enterprise Estonia. We pieced this together by going over financial reports for the companies. How they got it out is more difficult to determine from financial reports because the level of detail isn't there. Here are the three possibilities we think are likely:

1. Intangible assets. Meratel shows about 6 million euros on their balance sheet for "Concessions [goodwill], patents, licenses, trademarks", which is basically intellectual property. Since that is hard to value, and easy to trade, they could have purchased this from one of the other companies in their scheme as a way of getting money out of Meratel.
2. Goods invoices for equipment. When they bought their million euros of equipment that was funded by Enterprise Estonia, they could have bought it from one of the connected companies, and either paid an inflated price (see our Publification post for how that works) or never actually received the goods in question.
3. Giving goods away through debtor write-offs. Meratel shows about 2.8 million euros they are owed for unpaid invoices from customers. They also show 2.9 million euros in sales to China/Hong Kong, where Optiroam is located. They could provide goods to Optiroam, and never receive payment and write it off as bad debt. That amount represents 84% of Meratel's entire yearly sales.

Of course, we could be wrong about all this. Maybe Meratel is the most legitimate, honest, law-abiding company ever created. They set up this complicated structure of companies for some good reason, and "MagicSIM" is in fact a great technology used throughout the world. It's improving millions of lives and creating thousands of jobs in the Estonian economy.

It's possible, but we doubt it. It's just another "win" for the EstonianMafia of misusing taxpayer money.

Lessons Learned

Meratel, a five-person company, has received a total of 2,549,500 euros in taxpayer money. Estonia's business newspaper, Äripäev, included Meratel on a list of companies that received the most taxpayer money that year. Despite that, there was no reporting on how this was spent, nor any information on audits. Enterprise Estonia should have stringent audit requirements on all large projects, and the results of those audits should be made public.

In other news, over 20% of Estonians live in poverty. Maybe a "MagicSIM" will help?