Shareholder pullout Air Berlin Flying Solo

Struggling Air Berlin is likely to lose its cash lifeline with the departure of James Hogan from Etihad, its biggest shareholder. Indebted and burning money, Germany's second-largest airline is running out of options.
Quelle: dpa
But will they still be so close in a few months' time?
(Source: dpa)

On Tuesday, the Abu Dhabi-based airline Etihad announced what Handelsblatt had reported before Christmas: James Hogan is stepping down as its president and chief executive. He’ll leave in the second half of 2017 and will join an investment company of the United Arab Emirates, together with Chief Financial Officer James Rigney, who is also quitting. The search for their successors is underway.

Mr. Hogan’s employers found warm words of farewell. “We are very grateful to James,” said Mohamed Mubarak Fadhel Al Mazrouei, chairman of the board of the Etihad Aviation Group. “In just 10 years, he has overseen the growth of the company from a 22-plane regional carrier into a 120-aircraft global airline and aviation group.”

The Australian was effectively relieved of his duties at Christmas, said sources in Abu Dhabi.

The manager did indeed turn Etihad into a global player. But he’s leaving behind a portfolio of shareholdings that has been giving the sheikhs sleepless nights. Germany’s second-largest carrier Air Berlin, of which Etihad owns 29 percent, and Italy’s Alitalia (49 percent) have been burning money for years and there’s no prospect of them returning to profit.

Air Berlin must at last free itself from its dependence on Etihad. Gerald Wissel, Airborne Consulting

But Mr. Hogan has refused to concede he made mistakes. At the Global Airfinance Conference in Dublin last week, he defiantly defended his strategy of buying into struggling airlines. He said the investments had delivered “hundreds of millions of dollars” in additional revenues and allowed Etihad to fill its connecting flights.

That no longer chimes with what the people who represent Etihad’s owners, the ruling family of Abu Dhabi, are saying. “We must progress and adjust our airline equity partnerships even as we remain committed to the strategy,” said Mr. Mazrouei.

It emerged before Christmas that Etihad is reviewing its strategy and sources in Abu Dhabi say the sale of the loss-making stakes is an option.

However, no decisions have yet been taken. Some members of the board want a tough restructuring but others favor taking smaller steps, said sources close to the carrier. The sheikhs have therefore decided to inject more cash into the ailing units until a solution has been found.

Alitalia is getting €300 million ($322.5 million), and struggling Air Berlin recently received the same amount through an asset deal with its Austrian subsidiary Niki.

That should enable both airlines to make it through the winter but it won’t get them far, and Thomas Winkelmann is well aware of that. The current Lufthansa executive is due to take over as chief executive of Air Berlin at the start of February and he faces a Herculean task.

Air Berlin is undergoing a major restructuring that will halve the size of its fleet. It is leasing 38 planes and crew to Lufthansa while in a separate move a further 35 aircraft will be placed into a new leisure airline joint venture with holiday firm TUI.

Gerald Wissel, of Airborne Consulting, thinks Air Berlin has only one chance to survive at this point. “Air Berlin must at last free itself from its dependence on Etihad,” he said. It must take control of its timetable and only fly routes that make money, he added. “But that doesn’t mean it needs to cancel its partnership with Etihad.”

Air Berlin’s new chief must abandon any ambition to turn Air Berlin into a second Lufthansa, said Mr. Wissel. “That hasn’t worked so far and it won’t work in the future.”

Mr. Winkelmann has a mountain to climb — a mountain of debt totaling more than €1 billion as well as negative equity capital almost as high.

25 p22 Air Berlin in Turbulent Air-01

Air Berlin’s revamp could even worsen the problem in the near term.

Shortly to have just 75 planes, Air Berlin is shrinking to a relatively small carrier but for the time being it’s maintaining its structure as a full-service operation with its own direct sales, loyalty program, technical operations and more. The planned reduction of up to 1,200 jobs will take time and will initially boost costs. At the same time, fuel prices look set to increase. Lufthansa has already increased its fuel cost budget for the current year by €400 million.

To be sure, shifting large parts of the fleet into the joint venture with TUI and to Lufthansa will reduce Air Berlin’s operational risks and should stabilize revenues. But its business operations look unlikely to generate enough to cover the company’s financial obligations.

“Air Berlin continues to burn money each day,” said sources close to the airline. The company won’t comment on that.

Mr. Winkelmann would be unwise to bank on getting more cash from Abu Dhabi. Executives at Air Berlin aren’t ruling out that he might lease out more planes than planned to Lufthansa.

Air Berlin wants to increase its fleet of long-haul Airbus A330 planes from 14 to 22 by 2019. It has already signed the contracts but the market is tight and competition is fierce. A price war is raging on routes to North America and there’s no shortage of rivals on many routes to Asia.

Lufthansa Chief Executive Carsten Spohr has an eye on those planes because he wants to beef up the relatively small long-haul fleet of his budget unit Eurowings.

If Air Berlin’s restructuring doesn’t work, there’s always a Plan B: an outright takeover by Lufthansa. Mr. Spohr recently stressed that such a deal would face major hurdles, given the costs of an acquisition and Air Berlin’s high debt, as well as possible E.U. cartel concerns.

But insiders say that may just be a negotiating ploy. Sources at Lufthansa said the obstacles to a takeover could be overcome in the medium term. One unconfirmed scenario doing the rounds is that an Abu Dhabi sovereign fund could take a small stake of 3 to 10 percent in Lufthansa in return for settling Air Berlin’s debt.


Jens Koenen leads Handelsblatt's coverage of the aviation and space industry. To contact the author: [email protected]