Air Berlin Crisis Lufthansa to the Rescue?

Germany's second-largest airline Air Berlin needs the help of a stronger company to ensure its survival. Everything points to Lufthansa.
Air Berlin may be gobbled up by Lufthansa. Picture source: DPA

To say that Thomas Winkelmann did not have rosy figures to present last Friday would be an understatement. The Air Berlin chief executive had to tell investors that Germany's second-biggest airline recorded a record loss in 2016. While much of that net loss was attributed to restructuting costs, Mr. Winkelmann said the only way forward for this beleaguered airline is through new partnerships. Hardly any company fits the bill better than Germany's flagship carrier Lufthansa.

Air Berlin, which has posted a net loss in every year but one since 2008, is currently 29-percent owned by Abu Dhabi carrier Etihad. It is undergoing a drastic revamp that will halve the size of its fleet to around 75 planes. But the airline continues to struggle with debt and cost levels that have raised serious questions over whether it can survive. For more than a year, Air Berlin's share price has been dwindling seemingly without a floor, currently clocking in at a mere €0.55 ($0.60). Etihad, which is also struggling with Alitalia and may at some point have to consider looking for an exit from its European experiment, has been bankrolling its operations.

For Mr. Winkelmann, a former Lufthansa manager who took the helm of Air Berlin in February, the path ahead is clear: His airline needs more help. That could include a new investor. "I expect talks over partnerships to commence within the next weeks," Mr. Winkelmann said Friday, adding that nothing is ruled out at this point. Speculation has been rife that Lufthansa could go as far as taking over its chief German rival.

While Etihad on Friday it would continue to support Air Berlin's restructuring, Mr. Winkelmann hopes new partnerships will help the airline get on more solid ground. To achieve that, Mr. Winkelmann has been busy restructuring the airline more rigorously than his predecessors. He says he supports the new strategy embarked upon by his predecessor, Stefan Pichler, who in the fall of 2016 announced the airline would start to concentrate on long-haul routes from Düsseldorf and Berlin, but Mr. Winkelmann also wants to go further.

"Nothing is set in stone, there are no taboos," Mr. Winkelmann said, calling last year's results, which showed the airline making a whopping loss of €782 million ($854 million), "highly unsatisfactory."

 

02 p17 The Descent of Air Berlin-01

Mr. Winkelmann has been hard at work booking restructuring and other major one-time costs now. That's because, for any potential new partner to come on board, they have to be convinced that Air Berlin is solvent at the very least. Insolvency proceedings would result in the immediate withdrawal of the airline's operating license by the German Federal Aviation Authority and ground Air Berlin aircraft – a particularly delicate issue for Lufthansa.

The German flagship carrier already leases 38 planes and crew from Air Berlin. It's using those to expand its budget Eurowings arm and its subsidiary Austrian Airlines. An Air Berlin insolvency would cross Lufthansa's plans to expand short-haul and mid-range flight offering.

Management at Germany's largest carrier has not explicitly ruled out a takeover, but says there are three obstacles to a potential deal. These include anti-trust concerns, Air Berlin's debt and its high cost base.

But strategically, the two airlines seem to align. Sources have told Handelsblatt that the new Air Berlin boss is particularly keen on reducing the high aircraft leasing costs. "On average, we are paying 30 to 40 percent more than is usual for our size in the industry," an executive told Handelsblatt, resulting in additional costs of some €160 to €180 million each year.

Because of its abysmal credit rating, Air Berlin is hardly in a position to secure better leasing rates, while Lufthansa appears interested in making use of its own better financing conditions - a win-win situation.

Mr. Winkelmann's interest in expanding the airline's long-haul offers also strikes a cord with Lufthansa as well. "He sees great opportunities for long haul in point-to-point connections to airports away from the big hubs," an Air Berlin executive said of his CEO, referring to direct flights that passengers book without the need for a connection.

That is exactly in line with the strategy of Eurowings, which Lufthansa boss Carsten Spohr wants to see expand its long-haul routes.

German Chancellor Angela Merkel would surely have nothing against the Emirate's friendship with Lufthansa.

A complete takeover of Air Berlin could be problematic due to antitrust law, while factions of Lufthansa's supervisory board are also said to be skeptical of such a deal. Given these concerns, speculation is swirling over a potential fallback solution that would allow the two carriers to dispel any antitrust concerns – and place less of a burden on Lufthansa.

There are already signs of what such a fallback could look like. When Air Berlin leased its aircraft to Eurowings and Austrian at the beginning of the year, it founded the legal entity Air Berlin Aeronautics GmbH. Insiders told Handelsblatt that the newly established company also applied for an operational licence (AOC). That would prevent the aircraft from being grounded in the case of an Air Berlin insolvency. Long-haul jets could also be placed under that entity.

Air Berlin declined to comment on these speculations.

Either way, for the moment is seems clear that all the players involved, including politicians, want to avoid Air Berlin going bankrupt in an election year. Stakeholders will continue to work on a solution to the airline's net debt of nearly €1.2 billion and equity gap of €1.5 billion. Experts estimate the airline will accumulate a staggering 10 percent in interest on its liabilities.

And while Air Berlin's biggest shareholder Etihad already announced it would continue its support for the ailing airline, any step forward will require additional support from the Gulf capital. But there is movement on that front as well. Lufthansa CEO Mr. Spohr is a member of the economic delegation of German Chancellor Angela Merkel that visited Abu Dhabi on Monday.

While no details of the talks are known, Air Berlin was bound to be one of the issues under discussion. Debt relief and a closer partnership of Etihad and Lufthansa were likely among the ideas. German Chancellor Angela Merkel would surely have nothing against the Emirate's friendship with Lufthansa, as Abu Dhabi is an important partner for the German economy.Jens Koenen leads Handelsblatt's coverage of the aviation and space industry. To contact the author: [email protected]