Arabian Knight

Etihad's Investment in Air Berlin Hits Turbulence

Etihad and Air Berlin CEOs. Source Reuters
James Hogan (l) CEO of Etihad Airways and Air Berlin's CEO Wolfgang Prock-Schauer during happier days.
  • Why it matters

    Why it matters

    If Germany restricts Etihad’s ownership of Air Berlin, the Abu Dhabi group could pull out, throwing into question the future of Germany’s No. 2 airline.

  • Facts

    Facts

    • Etihad rescued Air Berlin with an injection of more than €300 million.
    • E.U. rules require airlines to be controlled by Europeans.
    • German aviation officials say no rules have been violated, but some politicians are wary.
  • Audio

    Audio

  • Pdf

Air Berlin, Germany’s second largest airline, may be slipping out of European control, senior politicians have warned.

The state premiers of Hesse and Bavaria, which both contain major airport hubs, raised concerns after Abu Dhabi-based Etihad Airways injected €300 million ($388 million) into its ailing rival to keep it afloat earlier this year.

The deal, comprising bonds and an extended shareholders’ loan, raised Etihad’s stake in Air Berlin to 29.2 percent. European Union law limits foreign ownership to 49 percent and states that control must be retained in the E.U.

A report by the German Federal Aviation Office into the ownership and control of Air Berlin stated that there was no “violation of standards.”  Majority ownership of the airline reportedly remains in the European Union. In addition, Etihad isn’t in control of Air Berlin, according the evaluation obtained by Handelsblatt.

But many worry that the civil aviation authority’s conclusions do not go far enough and could weaken Germany’s airline industry.

Lufthansa fears that state-financed airlines such as Etihad could increase pressure on Germany’s biggest airline.

There are also concerns that Air Berlin, aided by Etihad, could bypass Germany’s established hubs at Frankfurt and Munich by ferrying increasing numbers of passengers to hubs in the Arab region.

It is these fears that led Volker Bouffier and Horst Seehofer, state premiers of Hesse and Bavaria respectively, to lobby the federal transport minister.

In a letter, excerpts of which Handesblatt has obtained, Mr. Bouffier said Alexander Dobrindt should take action “in the national interest.”

“In view of the economic significance of the air transport industry, I request your critical observation” and “careful examination of whether effective control” by European owners “is still guaranteed,” he wrote.

Mr. Seehofer, leader of the Christian Social Union party, of which Mr. Dobrindt is a member, shared similar sentiments in a separate letter to the minister. Mr. Dobrindt replied saying his ministry and the Federal Aviation Office were in “close contact and will continue to carefully examine compliance with European law.”

G S08 Etihad-02

 

For Air Berlin, it’s do or die time. Two-thirds of Etihad’s €300 million ($388 million) investment has already been paid, with the final installment due in November. Without the cash, the airline may have been in acute danger of insolvency.

The two airlines designed the deal very carefully, including both convertible and new bonds. As long as the convertible bond isn’t exchanged for shares, the Arab airline’s stake will remain at 29.2 percent.

The maturity of the convertible bond is indefinite so that Air Berlin doesn’t lose its take-off and landing rights in Europe.

Turkish company ESAS Holding owns 12 percent of shares, meaning that only 41.2 percent of Air Berlin securities belong to investors outside the European Union.

Air Berlin denied that Etihad is now at the controls. “Air Berlin still fulfils all legal requirements to function as an independent European airline company based in Berlin,” a spokesman said.

But the airline may yet be required to act.

For instance, the Federal Aviation Office could recommend changing Air Berlin’s statutes to ensure its board of directors consists mainly of E.U. citizens.

The agency’s report also suggested that minutes of meetings should be made available to regulators “uncensored” and they should be notified in advance of meetings. Changes to the agreement between Etihad and Air Berlin should also be reported, the agency added. Mr. Dobrindt has reportedly sent the report back for review.

Although nobody wants Air Berlin to cease operations, Lufthansa Chief Executive Carsten Spohr, among others, demanded that at least the E.U. aid plan apply. Then the aid would be a one-off and bound to a restructuring of the company.

“These rules should also apply to air traffic when non-European, state-funded airlines assist an E.U. air traffic company,” he said.

Others demanded that Etihad’s traffic rights be restricted to prevent a transfer of flights. “Overall, the strength of the German air traffic market has to be the primary focus of all considerations,” said Stefan Schulte, the chief executive of Fraport, which operates Frankfurt airport.

 

This article was translated by James Breen. Vinny Kuntz also contributed to the story. Daniel Delhaes and Christoph Schlautmann are Handelsblatt editors. Contact the authors: Delhaes@handelsblatt.com and Schlautmann@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!