Rescuing the arch-rival?

Image: Lufthansa

German national carrier Lufthansa is in talks to rescue its arch-rival Air Berlin, ,Handelsblatt´ has learned. Europe‘s biggest airline is negotiating with Gulf carrier Etihad, Air Berlin‘s biggest shareholder with a stake of just under 30 percent, to acquire parts of the struggling airline that has been making losses for the past 10 years.

Image: Air Berlin

According to Handelblatt Etihad has shored up Air Berlin with credit of several hundred million euros in the past. But Germany‘s second-largest airline has kept on hemorrhaging money because it overreached itself with its ambition to be a premium carrier, budget and charter airline all in one. Lufthansa appears to be interested in taking over all Air Berlin routes that don‘t go via the hubs in Düsseldorf or Berlin, as well as around 40 leased aircraft including their crews.

The planes could join the fleet of Lufthansa‘s budget subsidiary Eurowings. The talks are scheduled to be completed by October at the latest. Up to now the three companies declined to comment.

If the deal happens, Air Berlin chief executive Stefan Pichler could use his remaining 100 aircraft to focus on routes to and from Berlin and Düsseldorf. And at the same time, Lufthansa Chief Executive Carsten Spohr could expand Eurowings. But the plans could run in to opposition from cartel authorities because it would give Air Berlin and Lufthansa dominant market positions at some airports. The government is, however, said to prefer a ,German solution´ for Air Berlin. Aviation sources said Mr. Spohr had told government officials that he would help Air Berlin if needed.

Air Berlin is doing all it can to generate revenue

Air Berlin has been offering a 30 percent discount on all European routes this month, ostensibly to help German soccer fans get over their national team‘s loss against France in the European Championship. But the move was more likely an attempt to fill empty seats. The loss-making airline is doing all it can to generate revenue, selling tickets cheaply and renting out aircraft and crews – to Finnair, for example.

Its net financial debt – gross financial liabilities less liquid assets – amounted to €825 million ($909 million) at the end of last year. No one knows how that mountain of debt can be paid off, especially as the company made an operating loss of €306 million in 2015.

Mr. Pichler has promised a marked improvement in results for the second half of the year and has been trying to sound upbeat. “In essence our business is moving in the right direction,” he said. But he‘s clutching at straws. The net loss may have fallen 13 percent in the first quarter, but the operating loss increased by 8 percent to €172 million.

Something has to happen Etihad knows

Etihad knows that something has to happen at Air Berlin. The Abu Dhabi airline and other shareholders, including Turkey‘s ESAS Holding, which owns around 12 percent, have been exploring options for months. A number of scenarios were examined including a delisting and a fundamental restructuring of Air Berlin, or a merger of parts of it with Italy‘s Alitalia, in which Etihad also holds a stake.

The scenario now being discussed includes Lufthansa‘s Eurowings taking over Air Berlin‘s slots at regional airports such as Hamburg and Nuremberg as well as 40 aircraft and their crews. The details of such a transaction are still undecided, not least because Air Berlin no longer owns any of the planes – they‘re all leased. In theory, Eurowings could just take over the leasing contracts and the personnel. Or it could resort to a so-called “wet lease” in which Air Berlin would rent out the planes and the crews to Eurowings.

Etihad chief executive James Hogan could avert a collapse of Air Berlin in this way. The carrier has given the German airline financial injections several times but is running out of options to help it without endangering the company‘s flying rights. That‘s because German airlines must by law be majority-owned by German investors and be managed from Germany. That means Etihad cannot acquire a majority stake.

Air Berlin in turn could grasp the deal as an opportunity to completely refocus its business. It could use its remaining 100 planes to become a purely network airline with its two hubs in Düsseldorf and Berlin. That would fit better with Etihad‘s premium business model and would also solve Air Berlin‘s core problem.

Benefit for Eurowings: one rival less in the market and solving the shortage of pilots

According to Gerald Wissel of Airborne Consulting, the  complexity and, in part, also the incompatibility of being a holiday airline, a feeder for Etihad, wooing business travellers, long-distance tourist routes and so on, had led to the current situation. Concerning Lufthansa he thinks, that the airline could expand its Eurowings unit without having to buy any new planes. “Eurowings wouldn‘t just have one rival less in the market; it would also solve the shortage of pilots, especially captains, which was created by the very tough stance toward its own pilots within the Lufthansa group,” Mr. Wissel said to Handelsblatt.

According Handelblatt Mr. Spohr wants to turn Eurowings into one of the top three European budget airlines. The carrier didn‘t get off to an auspicious start this year when it made headlines with long flight delays including one of more than 60 hours on a flight home from Cuba in January due to a technical problem. Mr. Spohr plans to expand the Eurowings fleet to around 230 aircraft, which is the critical mass for challenging the likes of Ryanair and Easy-jet. He has his work cut out, because Eurowings at present has access to only around 90 planes. That figure shows that the necessary growth can‘t be achieved organically. Mr. Spohr is focusing on a variety of partnerships and takeovers of other airlines. One option he aired recently would be to consolidate Eurowings with another airline. A deal with Air Berlin has another advantage for Lufthansa. It would secure control of important parts of Air Berlin‘s business and avoid rivals getting their hands on them if the carrier‘s problems were to worsen. The collapse of Hungarian carrier Malev showed how quickly Ryanair and other low-cost operators pounced to take over routes that became available.

Source: Handelsblatt Global Edition


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