Recently renationalized Air Baltic plans to continue its strategy of building a hub at Riga for Scandinavian and Eastern European traffic, and also plans to begin renewing its fleet next year.

Latvia’s government, which a few weeks ago resumed control of the airline after buying out a private investor, this week concluded an €80 million ($105 million) capital increase, putting the airline on firm financial footing. CEO Martin Gauss tells Aviation Week his priority is to pay outstanding fees and debt to restore confidence in the financial health of the company. That process is expected to be finalized before the end of this week, he says.

Among the options Gauss presented to the government was shutting down the airline, shrinking it, making it a point-to-point-airline or embarking on massive growth. But the government decided it wanted to continue the Riga hub plan that was initiated by former CEO Berthold Flick, who stepped down earlier this year, and which Gauss also supports.

Gauss, who formerly ran Malev and DBA, wants to make the Riga hub more profitable by focusing on routes with high potential while pulling out of unprofitable city-pairs. Air Baltic has a 50% transfer share at Riga Airport and a total market share of 67%.

One of the key ingredients of Gauss’s plans is fleet renewal, which will be done fairly aggressively, starting with replacement of many aircraft next year and the remainder by 2016. According to the Aviation Week Intelligence Network database, Air Baltic operates a fleet of 33 aircraft, including eight Bombardier Q400s, two Rolls-Royce-powered Boeing 757-200s, nine Fokker 50s and 14 Boeing 737-300s and -500s.

Gauss plans to retire the two 757-200s in 2012, saying, “they are too big for us.” He also wants to phase out the remaining Fokker 50s. Only five of the aircraft are operational on a revolving basis, and Gauss says they can be flown profitably only to a limited number of destinations. The Fokker 50s will be replaced by larger Q400s.

The process of replacing the Boeing 737 Classics will take until 2016 because of their longer-term leasing contracts. The airline plans to replace them with Airbus A320s or Boeing 737NGs.

Replacement of the existing fleet will begin early next year with leased aircraft. Gauss says financing is set for 2012, but the carrier will need additional funding once larger investment for aircraft renewal becomes necessary.

Just weeks after it took the airline back from minority shareholder Baltic Aviation Systems (BAS) the government already is in talks with potential strategic investors. But Gauss says he wants to work out the details of the airline’s future strategy before another ownership transaction.