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Saturday, November 7, 2015

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. 


  1. I, for one, welcome our new Air Baltic overlords.

  2. So many false facts...

    Starting from the first lines. Tu-134 was replaced with Boeings in 1995. Last year of profit was 2005. CRJ came before Embraer and was part of the CRJ-SAS deal, where CRJ offered discounts for SAS because of their crappy aircrafts having issues with landing gears. Though deal for Estonian wasn't economically good though, was rather forced by SAS to increase the purchase volume.

    But in general - 2008-2013 was real bad for Estonian, because of real bad decisions by politicians.

    1. Looks like Estonian Air had two periods of CRJs. The first was the CRJ-SAS deal, but at that time they were also using Boeings so it wasn't an all-CRJ strategy. Then they announced this year they're going to all CRJs, and getting rid of Embraers.

  3. Pointless rant. Estonian Air's issues were all a product of conditions under which they acquired their aircraft, which in turn were a product of turmoil within SAS. Even Lufthansa Consulting didn't find a viable way of running the company in green with the fleet available to Estonian Air.

    1. Sounds like blame the planes. It's unlikely whatever conditions you refer to were in place for all of the last 10 years they were losing money, and for all the different types of aircraft they tried.

    2. "Unlikely", blah blah. It's clear as water to anyone who bothers to go deeper than headlines from the first page of Google results: SAS/CRJ deal financing issues > suboptimal fleet > operating at a loss.

      Swedbank screwed Estonian Air over, but there's not even a mention of Swedbank in the above blog post.

    3. Estonian Air took delivery of their first CRJ-900 in 2011:

      Estonian Air has operated at a loss since 2005.

      They were losing money way before the CRJs.

    4. That's ridiculous to blame Swedbank. They pull out of the financing deal because Estonian Air's finanicials were a mess.

      If Estonian Air was so great, all the other banks would be rushing to Estonian Air's doorstep to provide financing. That never happened. Banks aren't going to loan to a company with a negative balance sheet and continued losses.

  4. Interesting article. I quite agree with it. Other small countries have lost their national airline since it was not competitive enough and the gap filled by other bigger and more international airlines.

    In that sense I have the biggest doubts concerning Nordic Aviation? What would the difference be?