airline industry An Elaborate Maneuver

As Air Berlin inches closer to insolvency, Lufthansa has been giving lift to its competitor through a buy-to-lease program as part of a collective effort to avoid collapse, Handelsblatt has learned.
Quelle: dpa
The deal between Lufthansa and Air Berlin goes further than many expected.
(Source: dpa)

Lufthansa appears ready to step in to save its top local competitor from insolvency, Handelsblatt has learned as more details of its wet lease agreement with Air Berlin emerge.

Germany’s flagship airline has been leasing 38 aircraft, complete with crews, from its flailing competitor, but a report from the Federal Cartel Office approving the lease agreement revealed that Lufthansa will also be buying 25 of those jets.

Under the arrangement, the aircraft will be initially leased to Air Berlin. They will then be rented back, complete with crews, by Lufthansa for its subsidiaries Eurowings and Austrian Airlines.

According to Germany’s top airline, there is one main reason for this confusing construct of buying, leasing and renting back the aircraft: By its internal calculations, it is simply more advantageous "to buy the used A320s out of the lease agreements and then lease them back to Air Berlin."

But business sources also point to another reason: The fear of default by Air Berlin.

Air Berlin has not turned a profit in years. It has high debts of about €1 billion or $1.08 billion, and its equity capital is in negative territory for about the same amount. Only through various capital injections from Etihad Airways, which is largest shareholder with more than 29 percent of shares, has Air Berlin managed to survive.

All this has led to a radical restructuring at Air Berlin, leaving some lessors concerned about the condition of their agreements. “Some had to be reassured,” one insider told Handelsblatt.

There is a threefold plan in place to save Air Berlin. In addition to the 38 jets leased to Lufthansa, Air Berlin's tourism subsidiary Niki will be incorporated into Tuifly as part of a joint venture. Etihad will hold just under 25 percent of the new tourism provider. With its remaining 75 aircraft, Air Berlin itself plans to concentrate on its Düsseldorf and Berlin hubs, as well as long-haul routes.

While Lufthansa appears to be prepared to rescue its competitor if necessary, its aim is to avoid that scenario, which is why Thomas Winkelmann assumed the top position at Air Berlin on February 1. The former Lufthansa manager is an ally of Lufthansa Chief Executive Officer Carsten Spohr and his mission is to stabilize the situation at Air Berlin.

This is a part of safeguarding the leasing business. Another part is spinning off the leased aircraft into a separate company, which can be left out in the event of a bankruptcy. The acquisition of the aircraft is ultimately for this purpose. Lufthansa, which for lessors is a solvent business partner, is assuming the lease agreements for 10 of the Air Berlin planes and buying 15. As a result, Lufthansa now has full control over the 25 jets.

Until recently, there was no risk that these planes would be part of the insolvency estates in the event of a bankruptcy. It is standard practice in the industry for airlines to lease a large percentage of their planes. In fact, Air Berlin now leases all of its aircraft, after having sold off its last jet last year. The step became necessary because Air Berlin needs every cent it can drum up.

In the event of a bankruptcy, the crews can quickly and easily be given new labor contracts, which would keep them operational. This measure ensures the ongoing operation of the Lufthansa subsidiaries.

With its remaining 75 aircraft, Air Berlin itself plans to concentrate on its Düsseldorf and Berlin hubs, as well as its long-haul routes.

Lufthansa could also be using the jets acquired in the lease in its fight against the expanding competition offered by Ryainair, which is also adding to the pressure Air Berlin is facing. Some of the jets acquired by Lufthansa are to be stationed in Hamburg and Palma de Mallorca. The former is already a target of Ryanair’s expansion into the German market, coupled with an increased presence in Nuremberg.

Ryanair has also recently started taking off from Frankfurt, Lufthansa’s main hub, which has yet to be serviced by Eurowings. That’s to change in summer 2018, it was recently announced. Until now, Lufthansa said it wanted to avoid competition between its airlines at one of its principle domestic hubs, but the new plans promise to avoid market cannibalization.

The Irish-owned Ryanair was one of several critics to the lease agreement signed by the two German carriers. Commercial chief Ryan O’Brien said that the deal would give the German airlines more than 63 percent of capacity of their home turf. But the Federal Cartel Office pointed out that Lufthansa was not aggressive in taking over the slots – take-off and landings rights from airports – Air Berlin was giving up as part of its restructuring, indicating that restraint was shown.

"The airport coordinator has determined that there were no abnormalities in favor of Lufthansa in the allocation of the slots returned by Air Berlin," reads the Cartel Office report. It notes that Lufthansa and all competitors were treated equally in the allocation of slots. "In particular, there was no evidence that Lufthansa had submitted its own applications in such a way that they would have been a better fit for the slots returned by Air Berlin than the applications of other airlines."

According to Airborne Consulting’s Gerald Wissel, this was a sign of the growing cooperation between the two businesses.

“It shows that Lufthansa is somewhat slowing down its competition with Air Berlin, so as to at least somewhat support its rival, which is now its partner,” the industry expert said.

06 p19 Air Berlin's Plane Deal-01


Jens Koenen writes about the airline industry for Handelsblatt. To contact the author: [email protected]