Estonia’s government has turned down an offer to acquire a shareholding in Air Baltic, as it looks to improve connectivity from the capital’s Tallinn airport.

Latvia’s ministry of transport had disclosed in June that it would make a formal approach to Estonian and Lithuanian governments and airports, inviting participation in Air Baltic’s planned initial public offering.

Transport minister Atis Svinka had stated that all three Baltic states benefited from having “one strong aviation market player”.

Investment from Estonia and Lithuania would “improve the IPO story” of Air Baltic, he added.

Air Baltic has already secured Lufthansa Group as an investor, and intended to offer similar terms to the Baltic states’ representatives.

But the Estonian climate ministry – which oversees various sectors including transport and energy – says the government has “decided not to acquire a stake in the airline Air Baltic… at this stage”.

It says it had been offered the stake “on the same terms” as Lufthansa, which is taking a 10% convertible share and will hold at least 5% of Air Baltic following the IPO – the timeline for which remains undecided.

“Acquiring a stake in Air Baltic is a weighty decision that will have a long-term impact on the country’s air connections, transport infrastructure and the country’s financial efficiency,” says Estonian infrastructure minister Kuldar Leis, who co-heads the climate ministry.

“In order to make such an investment, the country must have a very clear picture in front of it.”

Leis indicates that Air Baltic is still in a state of flux, having undergone recent senior management changes – long-term chief Martin Gauss stepped down after a no-confidence vote – and its financial results are still “stabilising”.

Air Baltic’s interim chief, Pauls Calitis, acknowledges that beginning of the year has been “challenging”, with the airline facing yield pressure and fuel-price volatility.

But he is optimistic for the second quarter based on preliminary data, with improving unit revenues, yields and load factor.

“Operational indicators, including engine availability, continued to meet our expectations,” he says. “With promising summer demand, we are in a good position to further strengthen Air Baltic’s role in our core markets.”

Chief financial officer Vitolds Jakovlevs adds that forecasts for the third quarter point to a “positive trend” in yield an unit revenue performance, even though passenger numbers are projected to fall slightly “in line with a planned reduction in production capacity”.

Estonia’s government, however, has yet to be convinced.

“Estonia cannot acquire a stake based on the current offer,” says infrastructure minister Leis. “Once the business plan is clear, the purchase of the stake can be reconsidered.”

While Air Baltic, with a market share of nearly 30% at Tallinn, is an “important strategic partner”, says Leis, the government’s immediate focus is to encourage connectivity by supporting development of the airport’s infrastructure, including its passenger terminal.

“The goal is to create a favorable environment where air connections and the number of passengers can grow – this will also support the Estonian economy more broadly,” he states.

Estonia will look to increase Tallinn’s appeal as a regional connection hub, with a route development programme and a freezing of the airport’s fees for the next three years, as part of an investment plan to be presented in the fourth quarter.

“This will give airlines, including Air Baltic, a clear and positive signal to expand operations in Tallinn,” says the climate ministry. Under the investment plan, Tallinn’s passenger terminal – which has reached capacity limits – will be expanded.