Major Restructuring

Lufthansa Rescues Air Berlin

resized Lufthansa Air Berlin air planes airport Duesseldorf source Oliver Berg DPA 66929865
Lufthansa is helping its rival Air Berlin, Picture Source: DPA
  • Why it matters

    Why it matters

    The collapse of Air Berlin would leave Germany with just one major carrier and open the country to even greater competition from low-cost rivals Easyjet and Ryanair.

  • Facts

    Facts

    • Air Berlin, Germany’s second-largest carrier after Lufthansa, will cut 1,200 jobs from its workforce of nearly 8,900.
    • The restructuring will reduce Air Berlin’s fleet to 75 by the summer of 2017 from 153 operated last year and focus its operations on the airport hubs of Berlin and Düsseldorf.
    • Lufthansa will pay Air Berlin at least €1.2 billion ($1.3 billion) in total to lease 40 of the Berlin-based airliner for a period of six years, starting next March.
  • Audio

    Audio

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Air Berlin, Germany’s second-largest carrier, will lease 40 planes to bigger rival Lufthansa and cut up to 1,200 jobs, or 13.5 percent of its total staff, in its latest bid to return to profitability, the loss-making and indebted company has confirmed.

The troubled airliner, in which Gulf carrier Etihad owns 29.2 percent, will also separate its touristic flying operations into a separate business unit for which “strategic options are being evaluated,” Air Berlin said in a statement late Wednesday, confirming media reports from earlier this week.

The restructuring will reduce Air Berlin’s fleet to 75 by the summer of 2017 from 153 operated last year and focus its operations on the airport hubs of Berlin and Düsseldorf.

“This is a restructuring born out of necessity and desperation,” said Gerald Wissel, managing director of advisory Airborne Consulting and a former Lufthansa manager. “What Etihad is willing to put into Air Berlin financially is limited and there are the well-known restrictions of foreign ownership. The family owning Etihad also did not want to put more money into Air Berlin.”

“Now more than ever, we are faced with significant external market pressures that dictate a change to our current complicated business model.”

Stefan Pichler, CEO, Air Berlin

Etihad took a stake in Air Berlin in 2011 and had wanted to turn the German company, founded in 1978 by a U.S. pilot, into a so-called feeder, providing passengers for the Gulf carrier’s long-haul flights from Abu Dhabi.

Air Berlin, which employed 8,869 people last year, has been struggling for years amid stiff competition from low-cost rivals such as Easyjet and Ryanair. It lost €447 million, or $502 million, in 2015 on revenues of €4.1 billion. Its first half loss this year was €271 million and debt reached €1.3 billion at the end of June.

“Now more than ever, we are faced with significant external market pressures that dictate a change to our current complicated business model,” Air Berlin Chief Executive Stefan Pichler said in the statement.

With Air Berlin performing poorly, there’s growing speculation that Mr. Pichler may soon be forced out as chief executive: “His departure is only a matter of time,” one insider told Handelsblatt.

Etihad, for its part, said it “supports the board of Air Berlin during the biggest restructuring in its history.”

Air Berlin’s shares, which have dropped 27 percent over the past 12 months, rose as much as 6.8 percent on Thursday and were up 1.8 percent at €0.76 by 11:42 a.m. local time in Frankfurt, valuing the company at €87 million.

Shares of Lufthansa, on the other hand, dropped as much as 3.6 percent after announcing the Air Berlin deal and a plan to buy control of Brussels Airlines, acquiring 55 percent of the Belgium carrier’s shares it did not yet own. It was trading down 2.7 percent at €9.79 at 11:42 local time Thursday.

 

 

 

20 p05 Air Berlin is Fighting for Survival-01

 

Lufthansa will pay Air Berlin at least €1.2 billion in total to lease 40 of the Berlin-based airliner’s aircraft for a period of six years, starting next March, according to statements from the two companies.

Lufthansa, which also has been struggling to compete against low-cost budget rivals such as Easyjet, Ryanair and state-backed Gulf carriers including Etihad and Emirates, said it would use the planes for its low-cost brand Eurowings and its subsidiary Austrian Airlines.

“Lufthansa wants to prevent competitors from taking over Air Berlin flights,” airline consultant Mr. Wissel told Handelsblatt Global Edition. “It doesn’t want this, so they’re saying: ‘We’ll take over.’ But this is not a strategy; it is also a bit out of desperation,”

Cologne-based Lufthansa launched a new strategy last year, turning its Eurowings brand into a pan-European and international low-cost airliner to compete against Easyjet, Ryanair, Vueling, Transavia and others.

Rivals Ryanair and Easyjet are efficiently organized, but Eurowings has a complex structure, for instance, its frequent flyer programs and various operators, and faces the integration of Brussels Airlines, according to Mr. Wissel. “I don’t think these new moves will help to make Eurowings successful,” he said.

Lufthansa itself is burdened by costly labor contracts, especially due to relatively well-paid pilots, who can retire as early as 55 years old. Its plans to force more flexible contracts on pilots at Eurowings have prompted a series of crippling strikes over the past few years.

Mr. Wissel said regulators might have objections to the leasing deal between Lufthansa and Air Berlin. “After taking over Air Berlin flights Lufthansa would practically be flying as a monopolist on some routes,” he said. “The anti-trust authority could decide to take away one of its flight on certain itineraries.”

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the author:  kreijger@handelsblatt.com

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