Air Berlin with its back to the wall
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Air Berlin CEO Joachim Hunold was unimpressed when investment bank Dresdner Kleinwort recently reduced its target market price for the carrier to zero. The bank's action was unusual at best, particularly in today's highly uncertain environment. There can be little doubt though that the structure of the Air Berlin Group is unwieldy and ill-equipped to enter a period of sustained high costs and low yields. What it does in the next few weeks to restore equilibrium will define the future for an airline group that would seek to usurp Lufthansa's role in the massive German market.
July's results were reasonably comforting. The carrier reported improvements on both the revenue and cost sides for the month. Revenue per ASK increased 14.7%, to EUR5.86 cents, and Mr Hunold announced that the airline's cost reduction programme was generally starting to show results in the areas of bookings, capacity and passenger yield, now improved over 2007 levels. But the Group still faces some major hurdles. With a sprawling empire including full or partial ownership of LTU, NIKI, dba and Belair, along with a melange of aircraft types, Air Berlin also has orders for over 150 aircraft, from Q400s to B787s.
With the carrier's expansionist strategy of growth by acquisition, that mixture would have been further enlarged recently by the addition of Condor Flugdienst. However, on 11-Jul-08 Air Berlin and Thomas Cook Group informed the German Federal Cartel Office that they were withdrawing the application to purchase, and that a proposed share swap had been cancelled "by mutual agreement". The companies cited the significantly changed economic framework conditions since the 2007 agreement as the main reason for withdrawing the application.
Under the terms of that agreement, Air Berlin would have acquired Thomas Cook's 75.1% stake in Condor, increasing its fleet to 160 aircraft. In return, Thomas Cook would have acquired almost 30% of Air Berlin at a cost then of around EUR600 million.
If it had proceeded, the acquisition of Condor would have made Air Berlin the fifth largest European airline, with a combined fleet of 166 aircraft (plus 25 B787s currently on order). Synergies from the takeover were expected to be in the order of EUR70 million annually.
But, as often happens when the wind changes, Air Berlin now will be concerned by reports that TUIfly, Germanwings and Condor are in advanced talks about a three-way airline tie-up. A combined TUI/Germanwings Group airline (even without Condor) would alone be a significant threat in the German market, handling approximately 30 million passengers per annum, behind Lufthansa's 56.4 million.
|
Airline |
Stake |
Date |
Background information |
|
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. |
|
|
100% |
Mar-07 |
Purchased from Intro GmbH for EUR140 million, including EUR190-200 million in net debt. While LTU remains a legally independent company, Air Berlin will integrate LTU's routes in the European market into its own network. Full integration is expected to generate synergies of up to EUR100 million annually. |
|
|
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% |
Sep-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. |
Whatever Dresdner Kleinwort's reasons for its dramatic downgrade, the market has not favoured Air Berlin over recent months. While its longer established competitor in the German market has prospered, the Group has witnessed a precipitous decline.
Lufthansa and Air Berlin share price: 02-Jan-08 to 11-Aug-08
Source: Centre for Asia Pacific Aviation, Lufthansa & Air Berlin
A more moderate plan of attack is now in the melting pot. Air Berlin has been one of Europe's fastest growing airlines in terms of passenger growth in 1H08, but the LCC now states it has "subdued" prospects for air passenger volume growth for the rest of the year, due to the slowing European economic environment.
The carrier had previously forecast 3-5% growth in passenger numbers, and an 18% increase in revenue to EUR3 billion this year, which it may be forced to revise if oil prices continue at elevated levels. Air Berlin also stated there is a possibility of further fare increases, which would also negatively affect passenger growth.
Air Berlin also announced probable accelerated fleet reduction measures. It had planned to reduce its fleet by 14 short and medium-haul aircraft, although the airline is now examining its fleet portfolio daily, stating that it is too early yet to say whether it would cancel or defer any of its large orders booked.
And other positive moves are afoot. In Jun-08 Air Berlin launched an efficiency programme for the Winter Schedule 2008, with plans to cut capacity on domestic and long haul routes, along with service suspensions and reductions.
Air Berlin efficiency programme: Winter 2008
|
Capacity reductions |
10%, and by up to 30% on some long-haul services |
|
Fleet plans |
Fleet of 120 aircraft at the end of 2008, instead of the previously planned 134. The airline plans to remove 14 short- and medium-range aircraft from service and four A330s. Three of the A330-300s will be put into service on medium-haul sectors, mainly from the Nuremberg hub, while the fourth A330 will serve as a stand-in for scheduled maintenance intervals |
|
Service suspensions |
Effective Winter 2008, Düsseldorf to Beijing, Shanghai, New York, Male and Colombo. (China services were inaugurated on 01-May-08, with potential reinstatement by Summer-09 "if and when new circumstances warrant it") |
|
Service reductions |
|
|
Service enhancements |
Miami, Fort Myers, Cancun, Male and Montego Bay |
|
Product suspension |
Has withdrawn plans to introduce a Premium Business Class in 2Q09 |
|
Dissolution of dba |
At the end of Oct-08, the Munich-based administrative seat of dba Luftfahrtgesellschaft will be dissolved. |
Armed with an ancillary revenue campaign and its reasonably encouraging July results, Air Berlin no doubt hopes that the tide will turn soon. Lower fuel prices will also breath a welcome element into its turnaround plans. Somehow though, the market will be looking for a more comprehensive strategic recovery programme if the carrier is to reverse its recent direction.