22-Aug-2014 8:05 PM

Airberlin's first 2Q profit since 2009 shows promise from its business model restructuring

Analysis

Airberlin has made its first 2Q net profit since 2009, although its operating result was still negative and both its net and operating results were in loss for1H. It seems unlikely that 2014 will see a full year operating profit, but losses are at least becoming narrower. Airberlin is now seeing the benefits of its Turbine cost reduction programme and its sharper network focus.

In Apr-2014, recognising that Turbine was not enough to restore sustainable profitability, airberlin announced a more fundamental review of its business model.

This review will continue until the end of Sep-2014, but CEO Wolfgang Prock-Schauer has provided some insight into the early results of airberlin's new thinking.

Summary

Airberlin reported a net profit of EUR9 million in 2Q2014, its first since 2009, although its operating result was still negative.
The airline's operating loss narrowed to EUR7 million in 2Q2014, compared to EUR8 million in the same period last year.
Airberlin's liquidity position has improved, with gross cash standing at EUR601 million at the end of 2Q2014, up from EUR223 million at the end of 2013.
The airline's focus on a smaller number of routes and increased frequencies is helping to achieve better pricing power.
Airberlin's common codeshare bookings with Etihad and oneworld partner airlines increased by 2% in 2Q2014.
The airline is undergoing a fundamental review of its business model, with a focus on increased efficiency, integration, and targeted market approach.

A net profit and a narrower operating loss in 2Q2014

In 2Q2014, airberlin reported a net profit of EUR9 million, turning around a loss of EUR38 million in the same period a year earlier. This result was boosted by a EUR32 million result on foreign exchange and derivatives, compared with only EUR2 million in 2Q2013, and so does not really reflect the underlying performance of the business.

The operating result was still in loss to the extent of EUR7 million, but this was a slight improvement on the EUR8 million operating loss of 2Q2013 in spite of a EUR34 million lower contribution from other operating income. Revenues grew 2.9% to EUR1,146 million.

For 1H2014, the net loss narrowed from EUR234 million to EUR201 million and the operating loss narrowed from EUR197 million to EUR190 million. 1H revenues were virtually flat (+0.1%) at EUR1,908 million.

Airberlin financial highlights 2Q2014

Increased liquidity although equity is still negative

Compared with the end of 1Q2014, shareholders' equity improved by EUR129 million, mainly due to the first tranche of EUR101 million of the subordinated convertible bonds subscribed to by Etihad (accounted for as equity). Nevertheless, the balance was still negative to the extent of EUR271 million at the end of 2Q2014.

Net debt was EUR708 million at the end of Jun-2014, down from EUR796 million at the end of Dec-2013. Gross cash stood at EUR601 million (53 days of revenue) at the end of 2Q2014, up from EUR223 million (20 days of revenue) at the end of 2013 thanks to new bond issues.

There is still a further EUR200 million to come from Etihad for the next tranches of the subordinated convertible bonds and this will commensurately further lower net debt, raise liquidity and improve the equity balance.

Airberlin's liquidity position now gives it time to pursue further restructuring without the short term fear of bankruptcy. Nevertheless, this alone will not restore a positive equity balance and airberlin will need to start recording full year net profit figures if it is to rebuild its equity without seeking further investment from Etihad and/or other shareholders.

See related reports:

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

Airberlin receives a vote of confidence from Etihad, but how will the relationship evolve now?

Airberlin balance sheet structure 31-Dec-2013, 31-Mar-2014 and 31-Jun-2014

Airberlin's 2Q2014 ASKs grew 3.5%

Airberlin followed its 4.4% increase in ASKs in 1Q2014 with a 3.5% increase in 2Q2014. Load factor fell, although the decline by 1.3 ppt was less than the 3.8 ppt fall in 1Q. The airline managed to operate 2.9% more flights year on year in 2Q, in spite of having 2% fewer aircraft.

The number of destinations as at 30-Jun-2014 was 15% lower than a year earlier, again highlighting airberlin's focus on increased frequencies as its growth driver.

Airberlin operating figures 2Q2014

Growth rates in common codeshare traffic with Etihad and oneworld slow down

In the words of CFO Ulf Huetmeyer on a conference call with analysts to discuss the 2Q results, "Abu Dhabi is our gateway to Asia Pacific", with 43 routes from there. Common codeshare bookings with Etihad continued to grow, although the rate of growth is unsurprisingly slowing, with numbers up 2% year on year in 2Q2014, compared with 12% growth reported for 1Q2014 and 74% growth for FY2013.

The winter 2014/15 schedule should see a boost to this growth rate as airberlin will add Abu Dhabi services from Stuttgart and Vienna and increase the frequency of its services from Berlin Tegel (moving it to double daily from once daily).

Airberlin common codeshare bookings with Etihad Airways ('000) 2Q2013 and 2Q2014

Common codeshare bookings with oneworld partner airlines also increased by 2% year on year in 2Q2014, compared with 12% growth reported for 1Q2014 and a more than tripling of numbers in FY2013.

Airberlin expects that the new codeshare agreement with US Airways, commenced in Jun-2014, will further add to its oneworld common booking numbers.

Airberlin common codeshare bookings with oneworld 2Q2013 and 2Q2014

RASK is almost stable

Airberlin's 2Q2014 revenues grew by 2.9% year on year, reversing the revenue decline of 1Q, but the increase was just less than the 3.5% increase in ASKs. Revenue growth was driven by flight revenue, with ground and in-flight revenues remaining flat.

Flight revenue per passenger increased by 3.0%, but total revenue per ASK fell by 0.6% (mainly reflecting the fall in load factor) in 2Q2014. This RASK development was an improvement on the 7.9% fall experienced in 1Q. This bears out comments made by CEO Wolfgang Prock-Schauer on the 1Q analysts' conference call, when he said that forward bookings indicated that RASK should stabilise from 2Q.

The positive yield development in 2Q suggests that airberlin's focus on a smaller number of routes may be helping it to achieve better pricing power, particularly given the challenging yield environment in Europe currently.

Airberlin revenues (EUR million) 2Q2014

	2Q2013	2Q2014	Change	% of 2Q2014 total
Flight revenue	1,025.6	1,057.5	3.1%	92%
Ground and other services	81.0	81.1	0.1%	7%
Duty free/in-flight sales	7.9	7.8	-0.1%	1%
Total revenue	1,114.5	1,146.4	2.9%	100%

Airberlin development of yield (flight revenue per passenger, EUR) and RASK (EUR cent) 2Q2014 vs 2Q2013

Airberlin CASK was down 3.7%

Operating costs were held just below last year's level in 2Q2014 (-0.3%), in spite of the capacity increase. This performance was helped by a 3.1% fall in fuel costs, mainly as a result of currency movements. Non-fuel costs increased by 0.6%, still below the increase in ASKs, reflecting the beneficial impact of airberlin's Turbine cost reduction programme.

Labour costs increased by almost 14%, in spite of headcount reductions, reflecting wage increases and restructuring costs. The other main areas of cost increases were airport charges, navigation costs and air transportation tax, all categories where rates are not controlled by the airline.

Cost per ASK (CASK) fell by 3.7% and ex fuel CASK fell by 2.8% in 2Q2014.

Airberlin cost development 2Q2014 vs 2Q2013

Business model restructuring: the first results

Mr Prock-Schauer gave an update to analysts on the first results of the restructuring of airberlin's business model that was first announced in Apr-2014. This process aims to restore airberlin to sustainable profitability, meaning "a certain profit margin", within three years. He stressed that there was not yet a "fully formulated restructuring programme" and that the full details would be communicated at the end of Sep-2014.

Nevertheless, he said that two major decisions had been taken.

First, airberlin will continue to serve what Mr Prock-Schauer called its "core segments", namely Europe, touristic and long haul markets.

Second, the CEO said that "a prerequisite to be successful is that we substantially change the way we do our business and serve our markets". He added that this means airberlin needs to be more efficient, more integrated where necessary and more targeted in its market approach.

Focus on the "DACH" region and Palma

More specifically, airberlin is to focus its European network on the top ten markets in the DACH region (Germany, Austria and Switzerland) and on its base in Palma de Mallorca. Its German bases represent 86% of the total number of seats in Germany (source: OAG, week of 18-Aug-2014).

It will operate high volume routes with high frequencies in point to point patterns, connecting its DACH bases to key European markets. It will connect Palma to "focus markets", including smaller markets in the peak season. It aims to maintain its leadership in Berlin and Duesseldorf, from where it operates long haul routes, and Palma de Mallorca. "Market leadership is key to success", according to Mr Prock-Schauer.

Aiberlin's bases

Agreement has been reached with labour representatives over the closure of five bases: Muenster/Osnabruck, Hanover, Dortmund, Erfurt and Dresden, although this does not mean that airberlin will stop serving these markets. As a result of the base closures, around 100 pilots will move to Berlin and Duesseldorf from 14-Nov-2014. This will enable increased productivity and lower operating costs.

A further element of increased base efficiency will come from the harmonisation of the narrow body fleet at each of airberlin's bases. This process has already resulted in all stations apart from Tegel, Duesseldorf and Munich being allocated either A320 or Boeing 737 aircraft.

The new network focus aims to reduce seasonality and adopt the base concept

One of the aims of the new network focus is to reduce the seasonality in airberlin's schedule. At its core will be year-round routes with no seasonal effects, supplemented by summer peak flying on leisure routes.

This summer peak will be facilitated by scheduling heavy maintenance in the winter and by switching some summer capacity from business routes to leisure routes.

Airberlin's schematic representation of reduced seasonality

Additional network focus and productivity will also come from the adoption of the base concept, enabling aircraft and crew to begin and end in the same place and eliminating complex rotations. The base concept is "a principle we have learned form the low-cost carriers", said Mr Prock-Schauer.

Airberlin expects the more focused network will result in a capacity reduction of around 10%.

Increased cooperation with partners, now that systems are in place

Mr Prock-Schauer said that cooperation with partners is extremely important to airberlin as a way to generate additional feed into its network, adding that its systems are set up to facilitate this. In addition to the DACH region, there are further developments to come in southern Europe, where the details of closer cooperation with Alitalia are currently being discussed, subject to regulatory approvals.

This is a further example of how Etihad, which is in the process of investing in Alitalia, encourages members of its equity alliance to develop partnerships between each other as well as with Etihad itself.

Airberlin: closer cooperation in Europe and globally

Beyond Europe, airberlin will expand its long haul network towards North America and Abu Dhabi from its Tegel and Duesseldorf hubs. All of its North American destinations are hubs of oneworld partner American Airlines (New York JFK, Miami, Chicago, Los Angeles) and most are served daily. Airberlin also has 21 weekly frequencies to the Caribbean.

Abu Dhabi serves as airberlin's gateway to the Far East, India and Africa through Etihad and fellow equity alliance partner Jet Airways. From the coming winter season, airberlin will operate 35 weekly frequencies to Abu Dhabi from Berlin, Duesseldorf, Vienna and Stuttgart.

Restructuring will also review airberlin's operating platforms

The current restructuring exercise also includes a review of the different operating platforms operated and used by the airberlin group in terms of their efficiency and sustainability. In addition to airberlin's own AOC, the group includes that of Austrian subsidiary Niki; belair, which operates on behalf of airberlin on routes from Zurich; German subsidiary LGW, which operates wholly under airberlin's livery and code; and TUIfly, which provides aircraft to airberlin under wet lease arrangements.

Mr Prock-Schauer said that the highest priority is to ensure the efficiency of the core airberlin platform and added that "it is very clear that all these platforms must contribute much more to the success of airberlin". The review of these platforms will continue until the end of Sep-2014, but Mr Prock-Schauer stressed that, whatever the outcome, they would operate under common systems.

Enhance commercial capabilities

The final element of the restructuring revolves around enhanced commercial capabilities. In terms of positioning, this means taking a different stance in different market segments.

In Europe, where Mr Prock-Schauer rightly says that "flying becomes more and more a commodity", airberlin will position itself as a "value carrier" and also as the "leading independent touristic provider". On long haul, its proposition will be that of the "classic full service provider".

Airberlin will ensure that its systems support all the segments. This will involve new and improved systems in revenue management and distribution and enhancements to support functions such as network management, sales.

RASK and CASK trends are both improving

Airberlin has made an operating loss every year since 2010 (excluding the gain on the sale of its FFP to Etihad in 2012). CASK has grown every year since at least 2006 and, in 2013, its loss widened as CASK growth exceeded RASK growth.

However, its 2Q2014 results, while still loss-making at the operating level, were its second successive quarter on an improving trend. Not only did CASK fall, but also it fell more than RASK in both of the first two quarters of 2014. Moreover, RASK was almost stable in 2Q.

It now seems that airberlin's Turbine cost reduction programme is having a noticeable impact on lowering CASK. In addition, it appears that its greater focus on a smaller number of more attractive routes is giving some support to RASK.

Encouraging signs, with still work to be done - and more focus on key priorities

The early results of the work airberlin has done on restructuring its business model suggest that it will gain further network focus, improved productivity and additional traffic feed from partnerships. In terms of its broader role, or reason for being, we have previously suggested that it needs to find a cap that fits.

See related reports:

Airberlin: still in need of a cap that fits, although 1Q2014 operating loss narrows slightly

airberlin: in need of a cap that fits after another underlying loss

Its decision to remain in the three market segments Europe, leisure and long haul suggests that it is still attached to too many hats, although the possible rationalisation of its platforms is welcome.

Fuller details of the restructuring will be available by the end of Sep-2014 and, as ever, the execution of airberlin's plans will then be key.

Although airberlin now has access to a significant pool of liquidity, its balance sheet is still far from robust. With a three year horizon until it expects to be achieving a sustainable level of profitability, it will need a solid capital base to insure against any potential airline sector downturn.

The improved direction shown in this result is encouraging and the opportunities in network building as the Etihad family grows appear to improve exponentially. This is where the long term must wrestle with the short term if the broader gains are to be successfully anchored.