DD: Baltia: the oldest, newest, airline that isn’t
Dan McCrum | Nov 25 2014 15:40 | 10 comments | Share
In the first of what may be an occasional series on the wonderful world of stock promotion, meet Baltia, which describes itself as “America’s newest airline”.
Airline may be stretching the term, however. The company has one aircraft, an ageing Boeing 747 sitting in a Michigan hangar.
The newness is also suspect, given that the company has been in an almost perpetual state of preparation to fly for 25 years. It was first organised in New York on “August 24, 1989 to provide air transportation to Russia and, the then, Soviet Union countries”. It hasn’t sold a ticket since, but it has sold a lot of stock.
Dissolution of its destination country may have caused problems, as Baltia spent its first decade preparing to fly without quite taking off. The initial SEC filing for Baltia Air Lines appeared in 1996 and, according to a later report, by 1999 the company had authorisation, licences, staff and equipment in place to start flying from JFK to St Petersburg.
The missing ingredient was money. A stock market listing was to provide the cash, but then something happened. Here is how Baltia described it:
The underwriter had indications for the full offering and offered the full amount of the offering to his exclusive clearing agent. The tender was refused. The clearing agent, CIBC Oppenheimer Corp., a wholy-owned subsidiary of the Canadian Imperial Bank of Commerce with significant financial interests in the airlines with which the Company would have been competing, selectively and without rationale or notice arbitrarily refused to clear the Company’s registered stock.
Damn those arbitrary banks. (A Baltia lawsuit against CIBC was dismissed). The US Department of Transportation, wary of underfunded airlines selling tickets, requires carriers to have at least a quarter of their first year’s operating expenses on hand before taking to the air. Baltia remained on the ground.
Undeterred, the company took itself to market by another route. In November 2001 it was listed on the pink sheets, the rough and tumble world of over the counter stock trading, where reporting requirements are rather looser than for an exchange.
Baltia remained ever hopeful. The 2003 annual report records that there was not enough cash to fly, although running costs were funded by the issue of stock and exercise of warrants. Igor Dmitrowsky, president, planned to raise cash the following year and laid out his spending plans: $450,000 for the certification process, $300,000 for general and administrative expenses, and even $300,000 for aircraft.
Much more than that was raised from investors, although never quite enough to turn plans into reality. In 2007 Baltia reported that it had at least taken office space at the JFK terminal and was busy preparing an operating manual for submission to the Federal Aviation Authority. Two separate consulting firms were employed to help get the text right on the crucial document.
In December 2008, Mr Dmitrowsky wrote directly to the Secretary of Transport requesting special consideration for his company’s application.
I cannot overemphasize the importance of acting now, in order for Baltia to capture the next year’s peak travel season. We must make commitments for aircraft delivery. Various other arrangements are in standby mode. The long wait in processing is also taking an emotional toll on Baltia’s staff.
Peak flying season came and went, however, and as 2010 dawned Baltia was still working on the manual. Still, it had received key regulatory permissions, secured landing and takeoff slots at JFK and, most important, actually bought a plane: a secondhand 747, albeit one without engines. LOL!!!
Mr Dmitrowsky had, by this point, raised $11.1m in cash from investors. Total assets at the end of 2009 were listed as $2.1m, $1.4m of it cash and the rest value attributed to the plane.
According to an enforcement decision by the Public Company Accounting Oversight Board made last year against Baltia’s long standing auditor, Michael Cronin, there were no related party transactions listed in the accounts in 2009. The PBOC found that the accountant and his firm had “failed to evaluate additional payments made on behalf of the CEO and payments to other officers of Baltia, and whether these payments were properly disclosed.”
Barry Clare, vice president of finance for Baltia, told us that it was a matter for Mr Cronin and the board, and that Baltia had not been harmed. He declined to discuss what harm might mean in the context of a loss making airline that has yet to fly passengers. “FAA air certification is a tricky process” he said. “We raise money from high net worth individuals who understand the business and the opportunity”.
In early 2010 Baltia reported that engines had been leased and installed, while aircraft liability insurance was also purchased. A second 747 also arrived later that year, purchased from Kalitta Airlines, a cargo airline based in the Willow Run Airport found near Ypsilanti Township, Michigan (population 53,362).
Time passed. Along with the 2012 report, Baltia submitted plans for the departure and arrival areas it had secured at Pulkorova Airport, a one terminal facility South of St Petersburg.
Baltia also reported it could tick along with monthly expenses, for administrative and compliance purposes, of only $200,000 to $400,000 per month. As luck would have it, these costs could be funded through the issue of common stock.
The first 747 was deemed surplus to requirements, however. It was sold at a $1.6m loss. The engines, Baltia said, were to be installed on the second 747 purchased from the cargo operator, while Baltia continued to pursue certification as a passenger airline.
At the end of last year the dream of a weekly non-stop service from New York to St Petersburg was alive. Producing fresh delay, however, the long FAA certification process in New York had been terminated, Baltia said, and begun afresh in Michigan. The cost had gone up, with those pre-running running costs now expected to stretch from $350,000 to $500,000 each month. Proceeds from another share sale, this time for $3.6m, helped to keep everything going.
By August this year Baltia was ready to start the large scale promotion associated with launching an international airline. It took the prestigious title sponsorship of the Thunder Over Michigan airshow, where visitors to Willow Run were able to see Baltia’s jet. The Ypsilanti Courier described the scene:
The 747 was not open for tours and it didn’t leave its parking space during the airshow, but it attracted hundreds of visitors –including those excited to see a large, commercial airplane for the first time ever, as well as those seeking shelter from the sun in the plane’s enormous shadow.
Mr Clare, told the Courier that FAA certification was expected imminently, before September 30, and Baltia could be airborne soon afterwards.
This is the furthest we’ve ever been in the process. We believe that we’re going to get our certificate on or before Sept. 30 and then we’re good to go.
As it turned out, the company received Gate II certification from the FAA on October 10. Good to go it is not. Fans of minutiae can read about the certification process here, but this flow chart gives some sense of the process. Gate II is the second diamond.
On his comment to the Courier, Mr Clare told us “I never said anything solidly that we were going to get it”. He said that starting an airline is expensive, typically costing $50m to $100m, and the company continues with the certification process. Asked about the funds raised from investors, he said “money was spent on operations”.
The most recent quarterly update makes clear just how much money was spent: Baltia reports that during its long development phase it has consumed approximately $35.5m in cash, and may finally have run out of money. It raised $7.5m from the sale of stock in the first nine months of this year, but spent $6.9m and “may not have adequate readily available resources to fund operations through December 31?.
Beyond the standard advice to read a company’s regulatory filings before giving it money, what conclusions should we draw from this tale of thwarted ambition? Some might conclude the act of building an airline is more lucrative, for those involved, than actually running one.
Others might wonder how the numbers could ever work, or if those investors really understood the capital needed to start an airline, even one planning just two transatlantic trips a week. Aviation message boards have for years poured scorn on the business model of a company whose principle output is press releases.
The broader point is about the way society helps and allows businesses to raise money. The Jumpstart Our Business Startups (Jobs) act was passed in 2012 to try and make it easier for US entrepreneurs to find funds. Helped along by the latest tech boom, there is plenty of enthusiasm for vogue-ish forms of crowdfunding, something endorsed this year with oversight from the UK’s Financial Conduct Authority. Red tape and regulated middlemen may be obstacles, but it is worth remembering that not every budding tycoon is a future Richard Branson.
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