ITEM 2 – Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion includes certain forward-looking statements within the meaning of the safe harbor protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that include words such as "believe," "expect," "should," intend," "may," "anticipate," "likely," "contingent," "could," "may," or other future-oriented statements, are forward-looking statements. Such forward-looking statements include, but are not limited to, statements regarding our business plans, strategies and objectives, and, in particular, statements referring to our expectations regarding our ability to continue as a going concern, generate increased market awareness of, and demand for, our service, realize profitability and positive cash flow, and timely obtain required financing. These forward-looking statements involve risks and uncertainties that could cause actual results to differ from anticipated results. The forward-looking statements are based on our current expectations and what we believe are reasonable assumptions given our knowledge of the markets; however, our actual performance, results and achievements could differ materially from those expressed in, or implied by, these forward-looking statements.
Our fiscal year
ends on December 31. References to a fiscal year refer to the
calendar year in which such fiscal year ends.
OVERVIEW
Baltia Air Lines, Inc. the “Company” or “Baltia” or “Baltia Air Lines”) is the only Part 121 (heavy jet operator) start-up airline in the United States today that has received Government fitness approval. The Company is currently in the second phase of the FAA Air Carrier Certification. The Company is a New York State corporation, organized in the State of New York on August 24, 1989.
On December 19,
2008, the U.S. Department of Transportation (DOT) issued its
Order to Show Cause, finding that the Company is fit,
willing and able to engage in international air transport of
persons, property and mail. The Company was awarded the non-stop
route from JFK to St. Petersburg Russia. Baltia was also
authorized for worldwide charter services.
On August 18, 2009, the Company purchased Boeing 747 aircraft (N705BL). In 2010 the Company purchased a second Boeing 747 aircraft (N706BL). The Company leased engines on a power-by-the-hour basis, which are installed on the aircraft. On January 11, 2012 the Company sold Boeing 747 aircraft (N705BL).
In the third quarter of 2012, the Company opened an office in Ypsilanti, Michigan, where flights crews will undergo flight training. Also, at this location, major aircraft maintenance will be completed on a contract basis by an aircraft maintenance contractor. This location will also serve as the Company’s flight operations center.
The Company currently carries $100,000,000 aircraft liability insurance, and has placed $10 million airline liability insurance through Aviation Risk Management Associates meeting the regulatory requirement in preparation for the commencement of revenue operations.
Following the
commencement of service on the JFK-St. Petersburg route,
the Company’s objective is to develop its route network to
Russia, Latvia, Ukraine, and Belarus.
We intend
to provide full service, i.e. passenger, cargo and mail, and
will not be dependent upon one or a few major customers.
The Company has two registered trademarks "BALTIA" and "VOYAGER
CLASS" and five trademarks are subject to
registration.
There is
currently no non-stop service from JFK to St. Petersburg.
Connecting service is provided mainly by foreign carriers.
Finnair, Lufthansa and SAS are the leading competitors in the
US-Russia market. KLM, British Airways, Air France, Austrian
Airlines, and Swissair also provide service. However, foreign
carriers are required to have intermediate stops at transit
airports in their respective countries (Helsinki, Frankfurt,
Stockholm, Copenhagen, etc.) because they are “third
nation” airlines and as such cannot fly directly
between the US and Russia (only a US airline as well as a
reciprocating Russian airline is eligible to fly nonstop).
Delta and two Russian airlines, Aeroflot and Transaero,
currently operate between JFK and Moscow. With the exception
of the JFK-Moscow route, there is no other non-stop competitive
air transportation service on the routes for which the Company
intends to apply.
The Company’s
objective is to establish itself as the leading non-stop
carrier in the market niche over the North Atlantic with
operations that are profitable and growing over time. In
order to accomplish this objective, we intend to establish
and maintain high quality service standards which we believe
will be competitive with the European airlines currently
providing connecting flights. The Company does not expect to be in
direct competition with deep discount airlines, including
several East European airlines and the offspring of the
former Soviet airline Aeroflot, which provide connecting
flights.
The Company intends
to provide First, Business, and Voyager Class accommodations.
The Company’s passenger market strategy is tailored to
particular preferences of the various segments of its
customer base, with marketing attention particularly focused
on American business travelers with interests in Russia who
require high quality, non-stop service from the United States
to Russia.
The Company’s
initial marketing strategy is based on existing agencies
specializing in the market, selected travel and business
publications, supplemented by direct mailings to corporate
travel planners, and individual American businesses that are
currently involved in Russia. Soon after the inauguration of
flight service, the Company plans to implement its frequent flyer
program. As the marketing matures, the Company plans to advertise
to the general public throughout the US, and in Russia.
The Company also plans to sponsor selected industry and trade
events in the US and in St. Petersburg.
The Company intends
to provide customer service and reservations centers in New
York and in St. Petersburg, to list the Company's schedules
and tariffs in the Official Airline Guide, and provide
world-wide access to reservations on the Company’s flights
through a major Computer Reservations and Ticketing System
(“CRS”).
The Company
intends to activate its reservations service when the DOT
issues its order authorizing the Company to sell
tickets.
The Company has
identified the following market segments in the U.S.-Russia
market: (i) Business Travelers, (ii) General Tourism, (iii)
Ethnic Travelers, (iv) Special Interest Groups, (v)
Professional Exchanges, and (vi) Government and Diplomatic
Travel.
The Company believes
that the direct non-stop service to be offered by it will be
superior to the stop-over service currently offered by
foreign airlines. A comparison between the two services with
respect to passenger convenience and cargo transport
efficiency is set forth below.
BALTIA - US flag, non-stop
service:
With non-stop service, a passenger can fly
from JFK to St. Petersburg in about 8 hours in a Boeing B747
wide body airplane. Cargo arrives containerized, palletized,
and secure.
Foreign, stop-over journeys:
With stop-over service, it would take a passenger 10 to 18
hours to fly through Helsinki, Copenhagen, Moscow, or
Frankfurt on a foreign carrier. In addition, passengers must
change to narrow-body aircraft at a layover airport. Cargo is
“broken up” and manually loaded onto narrow-body
aircraft, or trucked from Helsinki.
The Company plans to
operate efficiently and provide consistent high quality
service to passengers and cargo shippers alike in order to
establish the Company as the preferred airline in the market.
The Company also plans to use targeted marketing of its
service to maintain and grow its market share.
Because of the
increased reliability and comfort of a non-stop flight,
the Company expects to capture a portion of the existing
traffic.
With the Boeing
747 true wide-body aircraft, the Company intends to provide cargo
service from JFK to St. Petersburg, offering containers,
pallets, and block space arrangements. The Company expects to
carry contract cargo for express shippers. The Company also plans
to market its own “Baltia Courier”, “Baltia
Express”, and “Baltia Priority” express
service for letters and packages. The Company also expects
revenues from diplomatic mail and cargo, under the Fly
America Act.
The Company has
passenger service and ground service arrangements at JFK and
at Pulkovo II Airport in St. Petersburg. As a US carrier
flying into a foreign country, the Company will be eligible to the
same degree of priority that a foreign carrier receives when
arriving in the US.
The Company intends
to start the JFK-St. Petersburg service with one round-trip
flight per week, increase frequency to three round trips and
then to five round trips per week.
The Company plans to
build operating modules and apply them in developing new
markets. Once established, the Company plans to duplicate its
JFK-St. Petersburg standards on flights on other
transatlantic routes.
Additional revenues from charter
flying:
In conjunction with its Part 121 air carrier
certification (“Part 121”), (referring to a
“Federal Aviation Regulations” number, is an
industry acronym used to describe a US airline operating
heavy jet aircraft) for scheduled service, the Company intends to
seek certification for worldwide charter service. Following
certification, the Company plans to utilize aircraft time
available between scheduled service, to earn additional
revenues from charters. We are also considering qualifying
our aircraft for military contracts.
In order to
start revenue generating flight operations, the Company has
to complete FAA Air Carrier Certification. During the past
two and half years, the Company has been participating in air
carrier certification.
The Company
will carry airline liability insurance as required for a US
airline by DOT regulation.
As of March 31, 2013, the Company had a staff of thirty which includes professionals who have extensive major US airline experience in aircraft maintenance, airline operations, airline regulatory compliance, reservation, information technology, passenger service and administration.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the Company’s critical accounting policies and estimates as compared to the critical accounting policies and estimates and described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and filed on April 16, 2013, which we believe are the most critical to aid you in fully understanding and evaluating our reported financial results and the effect of the more significant judgments and estimates that we use in the preparation of our financial statements.
RESULTS OF OPERATIONS
We had no revenues during the three months ended March 31, 2013 because we do cannot commence revenue flights until we complete the FAA certification, and cannot sell tickets until such time.
Our general and administrative expenses increased $651,452 to $2,285,503 in the three months ended March 31, 2013 as compared to $1,634,051 in the three months ended March 31, 2012. We incurred a net loss of $2,506,838 in the three months ended March 31, 2013 as compared to a net loss of $3,390,810 in the three months ended March 31, 2012.
Our future ability to achieve profitability in any given future fiscal period remains highly contingent upon us beginning flight operations. The management believes that the Company has the necessary funding to commence revenue flight operations, subject to completion of the FAA Air Carrier Certification. If commenced, there can be no assurance that such operations would be profitable.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred a deficit during its development stage of approximately $91 million and consumed approximately $26 million of cash due to its operating activities. The Company may not have adequate readily available resources to fund operations through December 31, 2013. This raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Since our inception, we have incurred substantial operating and net losses, as well as negative operating cash flows. As of March 31, 2013, our working capital deficit was $741,879 and our stockholders' equity was $377,267. Our stockholders' equity increased by 230,080 from $147,187 on December 31, 2012
Our operating activities utilized $1,164,787 in cash during the three months ended March 31, 2013, a decrease of $128,526 from the $1,293,313 in cash utilized during the nine months ended March 31, 2012.
Our financing activities, from issuance of common stock, provided $1,319,827 and $1,131,606 in cash during the three months ended March 31, 2013 and 2012, respectively.
As a result of the foregoing, our unrestricted cash increased to $132,348 as of March 31, 2013, as compared to $12,326 as of March 31, 2012.
We had no significant planned capital expenditures, budgeted or otherwise, as of March 31, 2013