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Air Berlin to prioritise profit margins over market share

5-Nov-2009
Air Berlin CEO, Joachim Hunold
Air Berlin CEO, Joachim Hunold
  • Air Berlin to prioritise profit margins over market share;
  • Unit revenues reach highest levels in 18 months in Sep-2009;
  • Continues to gain market share, despite capacity contractions;
  • Air Berlin, and other European LCCs, benefiting from the global economic crisis;
  • Air Berlin reduces debt levels;
  • TUI subsidiary acquire 9.9% of Air Berlin, as part of Air Belrin’s takeover of TUIfly city routes;
  • New shareholding structure for Belair, as Hotelplan Group opts out;
  • Increases size of Swiss operation;
  • To Thailand in cooperation with Bangkok Airways;
  • Heading to America, with new destinations and increased frequencies.

Air Berlin CEO, Joachim Hunold, stated the airline plans to prioritise profit margins over market share.

Germany’s second largest carrier (after Lufthansa) reported a 4.4% revenue per ASK improvement to EUR 6.22 cents in Sep-2009 – with the highest per km figure in at least 18 months – indicating that this strategy is in full swing.

Air Berlin revenue RASK (EUR cents): Apr-2008 to Sep-2009

Air Berlin has reported impressive increases in RASK over the past two years, stemming from its effective capacity deployment plans and acquisitions that have reduced fare competition in some core markets.

Air Berlin revenue per ASK (RASK) growth (% change year-on-year): Apr-2008 to Sep-2009

However, despite its move away from a market share focus and despite a targeted capacity (ASKs) reduction of 4.8% in Sep-2009, the German LCC is continuing to gain market share, as growth in the European market continues to shrink at a greater rate.

During Sep-2009, Air Berlin transported 2.7 million passengers, a 5.0% reduction, with load factor decreasing ppts to 82.3%. 

Air Berlin vs AEA passenger growth (% change year-on-year): Jan-2008 to Sep-2009^

Air Berlin, and other European LCCs, benefiting from the global economic crisis

According to Mr Hunold, Air Berlin has benefited from trade downs by business travelers from full service carriers, with the CEO previously stating that the slowing economic conditions in Europe “could be an opportunity for us, as it increases cost-consciousness”.

Numerous other European LCCs, including Vueling, Ryanair, easyJet and Germanwings, have echoed Mr Hunold’s comments about the benefits of the economic crises on LCCs.

Air Berlin, and other European LCCs, benefiting from the global economic crisis

Air Berlin is also one of a few European carriers and associations, such as AEA and IATA, which have highlighted a need for a change in strategy in light of the current economic crises.

Vueling CEO, Alex Cruz, backed up this need, stating that airlines need evolve in order to remain viable. This need is not only limited to LCCs, but network carriers in general, with Austrian Airlines, in particular, cautioning that demand will likely not return to previous levels at the end of the current economic crisis, with pressures from LCCs continuing to be high and many Business passengers downgrading to Economy travel on a permanent basis

European airline comments on strategy/structural changes

Airline

 

Association of European Airlines

AEA reaffirmed the role of the network carriers as pivotal in Europe, but added, “no longer will we respond to the title ‘legacy carriers. It is true that, collectively, we have the experience and the expertise, and this will place us at the forefront of the new order facing our industry”. 

Air France

Air France-KLM launched its Premium Economy (Voyageur) offering on 25-Oct-2009. The carrier stated that while the product was originally designed as an upgrade option for Economy passengers, it is not being deployed to attract Business travelers who would have otherwise downgraded to Economy.

Austrian Airlines

Austrian Airlines co-CEO, Andreas Bierwirth, stated the carrier would no longer focus on niche markets in Eastern Europe, but rather fight for a stronger position in large-volume catchment areas in both Eastern and Western Europe. The carrier’s other co-CEO, Peter Malanik, cautioned that demand will not return to previous levels at the end of the current economic crisis, with pressures from LCCs continuing to be high and many Business passengers downgrading to Economy travel on a permanent basis. Mr Malanik stated the carrier “will have to reduce the price per seat significantly going ahead”, by targeting high-passenger volume markets and replacing smaller aircraft with larger Airbus aircraft. He added this fleet shift is planned for 2010.  

Germanwings

Germanwings CEO, Thomas Winkelmann, has predicted the eventual demise of the Ryanair model, due to its inability to attract the corporate market. According to Mr Winkelmann, “I think the Ryanair model is coming to an end. The more Ryanair flies to a destination, the more losses taken by the airport and the local tax payers won't stand for that”.

IATA

IATA CEO, Giovanni Bisignani, noted that "the situation you see with yields could be a long-term disaster because when yields fall they almost never recover. That could lead to long-lasting structural change”. 

Ryanair

Ryanair CEO, Michael O’Leary, stated the LCC does not need to secure an agreement with Boeing for additional aircraft for the post-2012 and that the carrier could instead shift to a strategy of rationalising routes, building up cash and paying dividends to shareholders. According to Mr O’Leary, “if we order no more aircraft the fleet will be at 300 aircraft by 2012. We may not grow at all after 2012. [Not growing] would allow us to weed out some of the poorer routes, some of the poorer aircraft bases, and switch those aircraft to new opportunities, while building up cash and distributing some money to shareholders”.

Vueling

Vueling CEO, Alex Cruz, stated airlines must evolve in order to remain viable. He added that airlines need to find ways to differentiate themselves, while simultaneously controlling costs.  

Air Berlin reduces debt levels

Meanwhile, Mr Hunold stated that Air Berlin, which had planned to reduce its total debts to less than EUR600 million by the end of 2009, achieved that goal in mid-year and may reduce the level further.

TUI subsidiary acquire 9.9% of Air Berlin, as part of Air Belrin’s takeover of TUIfly city routes

Air Berlin confirmed TUI Travel subsidiary, Leibniz-Service, acquired 8.4 million shares in the carrier on 20-Oct-2009 (at EUR3.97/share), and now controls 9.9% of voting stock in the airline.

Air Berlin will conduct a capital increase of a corresponding amount, thereby realising EUR33.5 million in proceeds, which will be used for general corporate purposes

The move follows the implementation of an agreement on 07-Sep-2009, whereby Air Berlin will takeover the city flights network of the Hapag-Lloyd Fluggesellschaft (TUIfly) airline, effective from the 2009/10 Winter schedule.

However, Air Berlin and TUI Travel will no longer implement the previously-announced cross-shareholdings, with Air Berlin confirming it has no short or long term plans for a complete takeover of TUIfly.

Through its takeover of the TUIfly city routes, Air Berlin is strengthening its presence in the Cologne, Stuttgart and Italy markets, with Mr Hunold stating, the move is “extremely important for business customers in particular”.  

The approval of the agreement means that all previous inter-city services will become the commercial responsibility of Air Berlin from the start of the 2009/10 Winter schedule (25-Oct-2009). This covers all domestic German services in addition to those to Italy and Austria. All services already booked with TUIfly for these routes will then be handled by Air Berlin.

To this end, Air Berlin will charter aircraft from TUIfly by way of a long-term leasing contract: initially 13 aircraft for the 2009/10 Winter schedule and then 14 aircraft from Summer 2010 onwards (wetlease included).

New shareholding structure for Belair, as Hotelplan Group opts out

Air Berlin announced plans to strengthen its base in Switzerland, as part of which the carrier will change its shareholding structure of Belair Airlines (Belair), a charter carrier headquartered in Glattburg and based in Zurich.

Air Berlin transferred the option of a 51% share in Belair, agreed in 2007, to a Swiss trust, which has exercised this option with Hotelplan Holding and become the new owner of the 51% stake in Belair.

This change of ownership leaves Air Berlin’s holding unchanged at 49% (Belair’s accounts will continue to be fully consolidated in Air Berlin’s financial statement), with the trust having granted Air Berlin an option to acquire the 51%.

The Hotelplan Group will remain “an important tourism partner of the airline”, with CEO of the Hotelplan Group, Christof Zuber, to continue as Chairman of the Board at Belair.

Mr Hunold remarked that “despite the challenging market environment we have managed to build on our position in the Swiss market and to offer our Swiss customers a wider range of services”.

In Mar-2007, the Air Berlin Group announced the acquisition of a 49% share in the airline from Hotelplan Holding AG, with the agreement being finalised in Nov-2007, as part of its expansion strategy, which also saw it purchase domestic rival DBA, the former German unit of British Airways, in 2006, and the charter airline, LTU, the following year. Through this acquisition strategy, Air Berlin has become Europe’s third largest LCC.

The Air Berlin group

Airline

Stake

Date

Background Information

NIKI

24%

Jan-04

Air Berlin and NIKI (established by Niki Lauda) announced a cooperation agreement in Jan-04. Air Berlin took over flight and crew planning, sales guidance and PR work as service provider for NIKI. The flight operations, ground services, technical support, controlling, marketing and tour operator sales departments remains based in Austria.  

LTU

100%

Mar-07

Purchased from Intro GmbH for EUR140 million, including EUR190-200 million in net debt. While LTU will remain a legally independent company, Air Berlin will integrate LTU's routes in the European market into its own network. Starting from 2008, the integration is expected to generate synergies of up to EUR100 million.

dba

100%

Aug-07

The takeover, cleared in Sep-07, enables Air Berlin to expand the scope of its route network, and appeal to the business traveller market (Air Berlin gained 62 new corporate contracts through the acquisition, as well as dba slots at Munich and Düsseldorf).

Belair

49%

Nov-07

Assumed economic control on 01-Nov-07.  The first of two Belair B757s with the new Air Berlin livery commenced service on 01-Nov-07.

Increases size of Swiss operation

Over the past two years, the Air Berlin Group has doubled the size of its fleet in Switzerland from three to six aircraft, to triple in size in the European Spring 2010. By then another three aircraft will have been added to the fleet, making a total of nine Airbus aircraft (eight A320s, one A319).

Over the next few months, Air Berlin is planning to create more than 100 new posts for cabin staff and 30 for cockpit staff in Switzerland, increasing the number of employees to approximately 320 (200 cabin crew, 100 pilots and 20 ground staff) by Summer 2010.

These new staff will be necessary as the carrier introduces additional services to Spain and Italy for its Summer 2010 (from Mar-2010) schedule as follows:

  • Spain: From Mar-2010, the Air Berlin Group (Belair) will operate its first Zurich-Malaga service, with a four times weekly frequency. The carrier will also launch Basel-Ibiza service from May-2010 on a twice weekly basis and Zurich-Ibiza services will increase from twice weekly to three times weekly. The carrier will also reintroduce Summer services from Zurich to Alicante
  • Italy: For the Summer 2010 schedule, the Air Berlin Group will be increasing the number of services from Switzerland to Italy. In Mar-2010, the airline will launch new services from Zurich to Bari, Naples and Palermo, each with three times weekly frequency. The carrier will also increase frequency from Zurich to Lamezia Terme and Olbia from once to twice weekly from Apr-2010. The carrier will also launch service from Basel-Mulhouse-Freiburg to Catania, with twice-weekly frequency.

Air Berlin Group’s network from Zurich: Nov-2009

To Thailand in cooperation with Bangkok Airways

Air Berlin, meanwhile, announced plans to strengthen its presence in Thailand, with the signing of a codeshare agreement with Bangkok Airways for connecting services from Bangkok.

The agreement covers Bangkok Airways' services to Koh Samui, Chiang Mai and Phuket and Air Berlin connecting services to Düsseldorf, Berlin-Tegel and Munich. Feeder services will also be available from Frankfurt, Hamburg, Hanover, Karlsruhe/Baden-Baden, Cologne, Münster-Osnabrück, Nuremberg, Vienna and Zurich. 

A strategy of partnerships

Air Berlin Group Airline Partners

Partner Airline

Background Information

Hainan Airlines

Air Berlin has been co-operating with Hainan Airlines on the Berlin–Beijing route since Jan-2009.

S7 Airlines

Air Berlin and NIKI have been co-operating with S7 Airlines since 2008 on the routes from Düsseldorf, Frankfurt, Hanover, Munich and Vienna to Moscow.

LGW

Since Oct-2007 Air Berlin has been co-operating with Luftfahrtgesellschaft Walter and is responsible for the company’s marketing and sales. LGW operates 76-seater Q400 turboprops, ordered by Air Berlin in 2008 and leased to LGW, on services to on domestic scheduled flights. The turboprop aircraft ordered by Air Berlin destinations including Berlin, Düsseldorf and Westerland/Sylt.

Pegasus Airlines

Air Berlin and Pegasus Airlines started working together in Sep-2009, when their websites were linked, enabling customers of both airlines benefit from more extensive scheduled services within Germany, within Turkey, in Europe and for long-haul services. Since 2005 Pegasus Airlines has been part of ESAS Holdin, which holds approximately a 18% stake in Air Berlin. Ali Sabanci, CEO of Pegasus Airlines, has been a member of Air Berlin’s supervisory board since May-2009.

Bankok Airways

Entered a codeshare cooperation agreement on 28-Oct-2009, allowing Air Berlin passengers to book connecting services on the Thai airline

LTU, Belair and NIKI

Air Berlin co-operates with its Air Berlin Group subsidiaries

Heading to America, with new destinations and increased frequencies

Air Berlin also plans to launch long-haul Düsseldorf-San Francisco services (twice weekly) as part of the Summer 2010 schedule.

The carrier will resume daily service to New York and three times weekly service to Los Angeles (Air Berlin usually operates these two services on a seasonal basis, suspending the services during the Winter schedule). There will also be five times weekly service to Miami, four times weekly service to Fort Myers and twice weekly service to Vancouver during the Summer.  Air Berlin is offering two weekly non-stop flights from Düsseldorf to Vancouver. 

Air Berlin’s Americas destination map: Nov-2009

A330 equipment with a capacity of 303 seats (24 of Business Class) is used on the North American routes.

… and to Romania too

Air Berlin also announced plans to launch Munich-Constanta service from 18-May-2010. After Burgas, Dubrovnik, Krakow, Pristina, Sofia, Split, and Varna, the Romanian town of Constanta is Air Berlin’s eighth destination in Eastern Europe.  The carrier also plans to launch Berlin Tegel-Corsica and Stuttgart-Bodrum services.

NIKI, Air Berlin’s partner airline, is also augmenting its presence in Eastern Europe, with services to Bucharest and Belgrade from Feb-2010. 

In Summer 2010, Air Berlin will be increasing frequencies to Majorca from Frankfurt and Hamburg, and for the first time since 2007 there will be an additional daily service from Berlin-Schönefeld to the Balearic island.  

In other network news, Air Belrin launched 12 times weekly Vienna-Karlsruhe/Baden Baden service on 25-Oct-2009 and announced plans to launch three times weekly services from Frankfurt, Stuttgart and Dusseldorf to Jerez (Spain) in Nov-2009. Service between Vienna and Jerez will commence in Feb-2010.

Air Berlin background Information:

  • Founded in 1978, Air Berlin operates over 350 daily services to more than 100 destinations across Germany, Spain, Portugal, Scandinavia, Italy, Hungary, Switzerland, UK and North Africa;
  • Air Berlin operates a mixed fleet (now including 11 different aircraft types) of 124 aircraft, serving 99 destinations across its broad network;
  • The Air Berlin Group includes not only Air Berlin, but also the Austrian airline NIKI (24 %), the Swiss airline Belair (49 %), the Munich-based airline dba (100 %) and the Düsseldorf-based airline LTU (100 %).

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