Record Loss

Air Berlin in Rapid Descent

  • Why it matters

    Why it matters

    Germany’s second-biggest carrier is teetering on the verge of bankruptcy and yet another set of worse-than-expected results in 2016 means its main shareholder, Etihad, is closer than ever to lose its patience with Air Berlin.

  • Facts

    Facts

    • Air Berlin posted a net loss of €782 million ($854 million) in 2016, up from €447 million in 2015.
    • The losses are explained by restructuring costs as Air Berlin divides its operations into three parts, plus a major balance sheet clean-up.
    • The airline is determined to remain in business and still has the support of its biggest shareholder, Abu Dhabi-based Etihad.
  • Audio

    Audio

  • Pdf
Air Berlin
Air Berlin has had a very bad year. Yet another one. Source: dpa

Air Berlin, Germany’s second-largest airline, presented a frightening set of results on Friday, reporting a net loss of €782 million ($854 million) in 2016, up from €447 million in 2015. There was no let-up in the first quarter of 2017, when its net loss grew to €293.3 million from €182.3 million in the year-earlier period.

The numbers were expected to be bad but investors were still shocked. The impact of the airline’s restructuring on its everyday operations has been evident since last fall, with flight cancellations, a shortage of planes and crews and a slowdown in ticket sales. Air Berlin, which has made a net loss in every year but one since 2008, is 29 percent owned by Abu Dhabi carrier Etihad, and is undergoing a revamp that will halve the size of its fleet to around 75 planes.

“The unclear market position, the highly seasonal route network and the high operating costs of the old Air Berlin have led to these highly unsatisfactory financial results,“ said Thomas Winkelmann, who took over as chief executive in February. The results were made worse by Mr. Winkelmann’s decision to order a thorough clean-up of Air Berlin’s balance sheet.

But many skeletons in Air Berlin’s closet have been left by a string of transactions undertaken by long-serving Chief Financial Officer Ulf  Hüttmeyer to obtain fresh funding. Those deals resulted in costs, albeit with a delay, in addition to €335 million in restructuring costs.

“We are seeing the first structural changes that are necessary to create a sustainable future for Air Berlin.”

James Hogan, Outgoing CEO of Etihad

As a result, one shouldn’t focus solely on Air Berlin’s bottom line this time. The adjusted operating loss of €332 million isn’t that bad when compared with the hundreds of millions of euros in losses that larger rival Lufthansa suffered for years on its non-hub routes.

But such comparisons don’t help Air Berlin. The airline needs a sustainable business model. Mr. Winkelmann said he was confident of building one. “I have set about turning the loss-making hybrid carrier into a focused, cost-effective network airline. That also means sounding out new possibilities beyond the existing strategy,” he said.

But major obstacles need to be removed to make that happen. They include huge debts totaling €1.2 billion. The fact that Air Berlin was even able to release official results, meaning auditors have confirmed it’s a going concern capable of carrying on its business, suggests Etihad has agreed to keep providing financial support.

The outgoing head of Etihad, James Hogan, said on Friday: “Etihad will continue to support Air Berlin with its restructuring program. We are seeing the first structural changes that are necessary to create a sustainable future for Air Berlin.”

In the end, Etihad will likely be forced to take over the bulk of Air Berlin’s debt. The revamped, slimmed-down airline will never be able to service that level of debt on its own. It’s unclear, however, whether there are any plans to find a new partner for Air Berlin. But industry sources are certain that Lufthansa will play a major role in Air Berlin’s restructuring.

Under the reorganization, Air Berlin is creating a tourism joint venture with holiday charter airline TUIfly and combining these operations with Niki, Air Berlin’s Austrian subsidiary. It will also lease 38 aircraft to Lufthansa. The long-haul business remaining with the new Air Berlin would make a perfect fit for Lufthansa’s budget unit Eurowings, which wants to boost its long-distance services to keep up with low-cost rivals such as Norwegian.

Air Berlin could still remain independent rather than being acquired outright by Lufthansa. It could, for example, operate flights on behalf of Lufthansa. But whatever Air Berlin’s future looks like, it will first have to clear up ist balance sheet.

 

Jens Koenen leads Handelsblatt’s coverage of the aviation and space industry. To contact the author: koenen@handelsblatt.com.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!