30-Apr-2014 3:44 PM

Airberlin: Etihad to the rescue after another loss in 2013. Meanwhile codeshare partners are booming

Analysis

Another year, another loss for airberlin - a worse one, in fact. Its 2013 operating loss was double that of 2012 and marked four successive losses (excluding the gain from the sale of its FFP to Etihad in 2012). Capacity cuts helped unit revenues to increase, but unit costs grew faster, in spite of progress with the Turbine restructuring programme. It was always going to take time to turn the ailing airline around and airberlin expects further savings in 2014 and is more optimistic about this year, planning a return to capacity growth and targeting both an increase in RASK and a cut in CASK. Nevertheless, a return to a positive operating result will be a challenge.

Two years into its equity partnership with 29% shareholder Etihad, airberlin is still reliant on the latter's deep pockets and patience. Having such a backer creates breathing space, but is not a substitute for a viable strategy. Another rescue recapitalisation, now planned in 2014, should ensure airberlin's medium term survival, but it is in need of fundamental reform if it is to survive and thrive into the long term. Acknowledging this, airberlin CEO Wolfgang Prock-Schauer has announced a review of its business model.

Summary

Airberlin's operating loss doubled in 2013, marking four successive losses.
The airline's capacity cuts helped increase unit revenues, but unit costs grew faster.
Airberlin is reliant on its 29% shareholder, Etihad, for financial support.
A recapitalization plan is in place to ensure the airline's medium-term survival.
Airberlin plans to return to capacity growth in 2014 and aims to increase revenue per available seat kilometer (RASK) and decrease cost per available seat kilometer (CASK).
The airline's codeshare partnerships have delivered strong growth in joint passengers.

Airberlin's underlying operating loss doubles

airberlin's 2013 results, originally scheduled to be reported on 20-Mar-2014, were announced on 27-Apr-2014. In 2013, airberlin saw its net income crash from a small profit of EUR7 million in 2012 to a loss of EUR316 million. The reported operating result fell from a profit of EUR70 million to a loss of EUR232 million.

The prior year result benefited from the sale to Etihad of 70% of airberlin's topbonus frequent flyer programme. Excluding this transaction, the 2012 operating result would have been a loss of EUR114 million, so the 2013 result represents a doubling of the underlying loss.

Air Berlin PLC highlights: 2013 vs 2012

	2012	2013	Change
Revenue (EUR mill)	4311.7	4146.8	-3.8%
Operating result	70.2	-231.9	-430.3%
Operating result ex topbonus sale	-114.2	-231.9	103.1%
Net income	6.8	-315.5	-4739.7%
Gross debt	1098.1	1019.1	-7.2%
Cash	327.9	223.1	-32.0%
Net debt	770.2	796	3.3%
ASK billion	60.3	57.3	-5.0%
RPK billion	50.4	48.6	-3.6%
Load factor %	83.6	84.8	1.3
RASK EUR cent	7.15	7.24	1.3%
CASK EUR cent	7.47	7.75	3.7%
CASK ex fuel EUR cent	5.59	5.89	5.2%

Airberlin has negative equity and low cash balance

2013 was the fourth successive year of operating losses (excluding the impact of the topbonus sale in 2012). Accumulated losses have wiped out airberlin's book equity, which stood at minus EUR186 million at the end of 2013, while net debt reached EUR796 million.

This net debt figure compares with airberlin's Nov-2013 target of EUR650 million, itself revised up from a previous target of EUR500 million.

The group's cash balance fell from EUR328 million at the end of 2012 to EUR223 million at the end of 2013. This fall in cash occurred in spite of selling EUR198 million of fixed assets and raising almost EUR230 million in loans and convertible bonds. Over the second half of 2013, cash fell by EUR214 million and the year end figure was equivalent to only 20 days of revenues.

Air Berlin PLC revenues, net profit and operating profit (EUR million): 2005 to 2013

Recapitalisation is planned

The weakness of airberlin's balance sheet, with negative equity and low cash balances, has led to 29% shareholder Etihad agreeing to provide a further EUR300 million cash injection in the form of a cumulative perpetual subordinated convertible bond. In addition, a further EUR150 million will be raised through the issue of a new corporate bond (and EUR100 million of existing bonds due in 2014 and 2015 will be refinanced with a longer maturity). The negotiation of this recapitalisation process led to the delay in airberlin's reporting of its 2013 results.

On a proforma basis, the impact of the recapitalisation on the end 2013 balance sheet would be to reduce net debt to EUR496 million, to increase equity to EUR114 million and to increase cash to EUR673 million (59 days of revenues). This gives airberlin much more breathing space to pursue its restructuring, which must remain the group's top priority.

Over the past three years, airberlin has burnt around EUR200 million annually in operating cash flow, before capital expenditure, and has only survived with the support of Etihad in 2012 and 2013. According to the CAPA Fleet Database, airberlin has 52 aircraft on order (37 narrowbody and 15 widebody), for delivery between 2014 and 2018. Without a fundamental restructuring to reverse its negative cash flow, its long term future will be very doubtful.

Etihad increases its investment without increasing its ownership stake

Although described as a loan, the EUR300 million convertible bond subscribed by Etihad is treated for accounting purposes as equity as it has no maturity date and is convertible into shares. Moreover, airberlin is not required to pay interest on the bond.

Etihad has thus provided airberlin with a cash injection without burdening it with additional interest payments or the obligation to repay the loan. These are features normally associated with equity, but the approach taken means that Etihad is not increasing its stake in the voting equity. This is designed to ensure that Etihad does not risk contravening limits on foreign ownership by raising its ownership beyond the 29% level that it already held.

The European Union is already investigating Etihad's investment in airberlin to consider whether or not it might contravene regulations on non-EU control. This new cash injection may heighten the rigour with which this investigation is conducted, although airberlin told analysts on a conference call to discuss the 2013 results that it did not expect this to be the case.

Airberlin plans 2013 capacity cuts and load factor gains (but load factor fell in 2H)

In 2013, airberlin cut its seat capacity by 6.9% and passenger numbers fell by 5.4%. ASKs were down 5.1% (less than the fall in seat numbers due to longer average sector length), with RPKs down 3.6% and passenger load factor up 1.3 ppts to 84.8%. This load factor compares favourably with the 2013 average for members of the Association of European Airlines of around 80%.

However, the load factor improvement was not uniform across the year as gains in 1H2013 turned into load factor declines in 2H2013. This reflected challenging market conditions in Europe as a result of better than usual weather in northern Europe and competitive capacity growth in certain markets.

airberlin passenger numbers (million), ASKs (billion) and passenger load factor* (%): 2005 to 2013

airberlin monthly load factor: 2011, 2012 and 2013 (%)

Codeshare partnerships are delivering strong growth in joint passengers

airberlin has codeshares with 16 airlines, including members of the Etihad equity alliance, oneworld alliance partners and other, non-aligned, airlines. In 2013, common codeshare passengers with Etihad grew from 323,000 in 2012 to 562,000 and common codeshare passengers with oneworld grew from 310,000 in 2012 to 1,013,000.

In 2014, airberlin expects to add a further 200,000 codeshare passengers, bringing the total to more than 5% of its passenger numbers.

Etihad/airberlin development of common passengers: 2012 and 2013 ('000)

oneworld/airberlin development of common passengers: 2012 and 2013 ('000)

Airberlin's revenues were down 3.8% in 2013

airberlin's revenues fell by 3.8% in 2013, less than the cut in capacity, with revenue per ASK up 1.3% in line with the gain in load factor. The fall in flight revenues of 4.8% more closely reflected the ASK cut, while revenues from ground services increased by 12%. Duty free and in-flight sales fell by 20%.

airberlin revenues: 2013 (EUR million)

	2012	2013	Change	As % of 2013 total
Flight revenue	4007	3816	-4.8%	92%
Ground and other services	273	306	12.0%	7%
Duty free/in-flight sales	32	26	-20.3%	1%
Total revenue	4312	4147	-3.8%	100%

Costs were down 1.5%, but did not match capacity reductions

Operating costs fell by 1.5%, failing to match the cut in capacity and the drop in revenues. Costs per ASK grew by 3.7%, with ex fuel costs per ASK growing faster at 5.2%.

airberlin's Turbine cost restructuring programme achieved savings of EUR207 million in 2013, just ahead of its EUR200 million target, but 2013's results also included restructuring costs of EUR40 million. Turbine continues into 2014, when the cumulative cost reduction target is EUR400 million.

airberlin cost per ASK excluding fuel (EUR cent): 2012 and 2013

2014: airberlin will return to capacity growth

airberlin has not provided any profit guidance for 2014, but has set targets for capacity growth. It plans seat growth of more than 3%, with the strongest growth expected in domestic Germany and on the intercontinental network (more than 5% for both), while domestic Spanish routes will see seat numbers cut by more than 20%.

ASK growth is expected to be higher than seat growth, at more than 4%, and airberlin expects load factor to improve by at least 2.5 ppts.

There is to be a greater focus on airberlin's Duesseldorf and Berlin Tegel business, where it is the number one carrier, and much of the capacity increase will come from higher frequencies. Non-strategic routes with high seasonality are being withdrawn.

airberlin planned seat growth by business unit: 2014

2014: RASK is expected to grow and CASK to fall

Airberlin expects RASK to increase and ex fuel CASK to fall in 2014.

Its strategy for RASK improvement includes further gains in load factor, the development of the business segment, an enhanced point of sale strategy and further development of its codeshare with Etihad and oneworld.

Airberlin has achieved RASK growth in recent years, although this has been helped by ASK reductions since 2011. This year will be a key test of whether it can continue RASK growth when capacity is also growing once more. Mr Prock-Schauer told analysts that current indicators demonstrated a positive RASK trend currently.

Air Berlin PLC - index of operating cost per ASK and fare revenues per ASK (each indexed to 100 in 2006)

Although airberlin does not have a good track record on unit cost in recent years, its aim to cut CASK in 2014 has some early positive back-up: total CASK fell by 8% in 1Q2014, according to the company's presentation.

The lower unit cost outlook should be helped by ASK growth and also by reductions in fixed costs. For example, airberlin says that aircraft ownership costs will fall as a result of fewer planned aircraft, lease rate renegotiation and USD currency movements. In addition, it expects increased crew productivity, the benefit of Turbine initiatives and the cessation of restructuring charges.

airberlin year end fleet 2013 and planned 2014

Etihad is there for the long term…

Etihad and airberlin say that their codeshare partnership has so far led to additional joint revenues of EUR200 million. In addition, Etihad talks of cost synergies "through joint procurement initiatives in aircraft, engines, maintenance, catering and technology."

Referring to its equity investment in airberlin, Etihad CEO James Hogan said "for less than the cost of a single wide-body aircraft, Etihad Airways gained access to more than 30 million passengers and a combined European network of 228 destinations across 84 countries".

However, Etihad's total investment has been greater. After the new convertible bond, Etihad will have put a total cash sum into airberlin of more than EUR800 million (including equity, loans, convertibles and the acquisition of topbonus). This could be even more, if it also participates in the new corporate bond. For the short term this looks to be a large sum for a minority stake in a loss-making airline with a track record of consuming cash at the rate of EUR200 million every year. Incremental revenues are valuable and look set to grow, but Etihad will be looking for a greatly improved bottom line at airberlin.

Airberlin will need a dramatic turnaround in its own profitability to justify Etihad's investment; contributing incremental feed into Etihad's network is itself not enough. Etihad has committed to airberlin for the long term, but nobody likes to keep throwing good money after bad.

… but airberlin still needs a deeper and more radical restructuring

And airberlin knows this. In addition to the Turbine programme, airberlin recognises the need for deeper and more radical restructuring in 2014 and 2015. CEO Wolfgang Prock-Schauer said in a company statement: "Even though the Turbine efficiency program has delivered according to plan and will take full effect in 2014, we have to increase the pressure during implementation, drive further measures as well as thoroughly evaluate our possible courses of action including airberlin's long-term business model".

airberlin has even created a new post, that of a chief restructuring officer. This may help to increase the focus internally on the need for change, but, after four years of losses, it also seems to have the effect of highlighting the lack of serious progress in achieving such change so far. At this stage, no further details of the new restructuring are available as options are still being considered.

While the recapitalisation should ensure that airberlin remains a going concern for the time being, the airline urgently needs to establish clearly improving trends in profitability in 2014 in order to set a course for a sustainable long term future.

Strategically the Etihad investment/partnership continues to look a viable measure, as Etihad expands its behind-gateway move into Europe. But the bean counters will become restless unless clear financial rewards are apparent at the German carrier.