Air Berlin’s story certainly hasn’t been one of success lately. Since 2008, Germany’s second largest airline has posted continuous operative losses for 6 consecutive years now.
From the late 1990s, the airline had experienced a decade long period of tremendous growth, accelerated in the late 2000s by a string of high profile mergers and acquisitions of, among others, dba and LTU.
But since reaching it’s peak in 2011 of 170 aircraft and over 35 million passengers flown, the airline was forced to shrink significantly to reduce costs. In that year, Air Berlin posted a consolidated loss of 420.4 million euros, compared to 106.3 million in the year before, despite a significant rise in ticket sales.
At that point, Air Berlin was no longer able to go on with business as usual.
Enter Etihad. The Middle Eastern carrier, already holding a 2.99% stake in Air berlin, increased this stake to 29.21% for a total of 73 million euros, becoming the airline’s largest individual shareholder.
Since then, Etihad has been the main supplier of cash for the ailing German airline. Etihad has bought several bonds from Air Berlin, among them a convertible bond for 300 million euros sold to Etihad only last month; and bought other parts of the airline, notably a 70% stake in its frequent-flyer program, Topbonus, for 184.4 million euros in 2012, leading to a narrow consolidated profit for the airline for the first time in years, despite significant operational losses.
Despite ending 2012 with a slightly positive Free Cash Flow, Air Berlin’s problems are far from over. The airline is still burning cash at an incredible speed. Its cost-cutting measures are seemingly evaporating on the spot.
The airline posted a consolidated loss of 315.5 million euros for 2013, after delaying its report for weeks while management was trying to raise additional cash from Etihad as Air Berlin had negative equity of 186.1 million euros at that point, with net debt reaching an unprecedented 796 million.
Recapitalization successful, but…
The airline has since been recapitalized by the issuing of several new bonds, most notably a cumulative perpetual subordinated convertible bond of 300 million euros to Etihad to resolve the negative equity situation. Air Berlin has also issued 2 non-convertible bonds for a total of 252 million euros, 90 million which stem from a bond issued in Swiss Francs and paying a lower coupon of 5.625% compared to the 6.75% of the bond issued in euros.
Air Berlin said it would use 150 million euros of the proceeds of those two bond sales to finance operations and the rest to refinance current debt.
These most recent bond sales were significantly cheaper for the airline than its previous collectings, which paid as much as 8.25% and 11.5% of coupon. Air Berlin CFO Ulf Hüttenmeyer said the airline was expecting investors to convert 100 million of this debt into longer running papers from the latest offering. However, it was unable to attain this goal as only 12.63 million were replaced, showing investors doubts over the airlines future prospects.
EU investigates Etihad’s stake
Further doubt concerning Air Berlin’s future is raised by the European Union, which is currently investigating Etihad’s engagement to assess whether or not the Middle Eastern carrier is controlling the airline.
While Etihad is not in breach of EU rules on foreign ownership, which command a majority stake in a European airline must be held by EU individuals, the Commission is investigating if and how Etihad might control the airline despite holding a minority stake only.
The EU said it is considering 5 airlines and their foreign stake holders in this process, with Etihad featuring prominently and multiply.
EU-Commissioner Siim Kallas’ inquiry about the airlines ownership structure coincided last month with speculation about a possible delisting of Air Berlin’s stock and a conversion of the company, which is currently a British PLC, into a German GmbH in combination with Etihad raising its stake to 49.9%. While the Executive Board of a PLC is not legally mandated to carry out directions from the companies owners, a GmbH’s executive is directly subordinated to the owners and thus much easier to control.
This conversion would have further strengthened the EU’s case and was not ultimately executed.
However, action from the EU is still in the realm of possibilites due to Etihad’s repeated major involvement in resupplying the Air Berlin with fresh cash.
Air Berlin is a money sink
Another big question mark is raised by the outlook for Etihad as an investor. While Etihad could theoretically continue to supply cash to Air Berlin in the same way as last time (if the EU takes no action), it becomes clearer and clearer that Air Berlin has become a significant money sink for Etihad, which has now supplied Air Berlin with a sum exceeding 800 million euros through various bonds, loans and equity/asset acquisition.
Concerns have been raised by the German government about the legality of the most recent convertible bond, which might be in breach of European Laws. Air Berlin denied such claims and considers it’s recent bailout to be in line with the law. The German government was not willing to give any further comments.
After the recent recapitalization, Air Berlin’s revised annual report’s cash statement stands at 673 million euros. At last years cash-burn rate, this money will be gone in no time. The airline is bleeding cash at a rapid rate, losing a total of 491 million euros of cash last year, only partially remedied by the sale of assets and bonds, leading to a net decrease of cash and cash equivalents of 103.2 million.
The airline’s Q1/2014 net loss rose to 210 million euros compared to previous year’s 196 million, biting off a significant chunk of the recently infused cash.
Despite attempts to change this with various cost-cutting measures, there does not seem to be any noticeable improvement of the airline’s situation. The long term survivability of the airline is therefore highly questionable. It is becoming more and more obvious that the airline will need a full scale makeover to become profitable again.
Major restructuring unavoidable
This includes a revision of the carriers business model, which it is currently advertising to potential investors as a ‘complementary business model’, aimed at business passengers, private individuals and tour organizers. The airline states on its Investor Relations website that it is currently in the process of transforming into a full service carrier, utilizing its global oneworld-network as well as its partnership with Etihad, something it calls a ‘clear strategy’.
The airlines management does however seem very reluctant or unable to significantly reduce the carriers footprint in one of it’s core markets. Its continued involvement in traditional holiday traffic to the Mediterranean, where the airlines roots lay, is contradicting Air Berlin’s transformation to a full service network carrier. A further construction site for the airline are its two hubs, Düsseldorf (DUS) and Berlin (TXL, to be BER), which are geographically close to each other and have a very large share of overlapping services.
The carrier has said it would return to capacity growth for 2014, after a 5.1% cut of available seat kilometers (ASK) in 2013. It is now planning to grow it’s number of seats by 3%, but the outcome of this is questioned by dropping load factors in 2013. Last year saw Air Berlin’s revenues down 4%, but costs even rose by 3.5%, thus failing to match the drop in revenues and aiding in returning the airline to it’s acute state of emergency.
In an attempt to remedy it’s decrepit financial state, Air Berlin has created the new posts of Chief Restructuring Officer filled by Marco Chiomperlik and Chief Strategy and Planning Officer, which will be filled by Etihad’s John Shepley until a permanent candidate has been found.
Air Berlin CEO Wolfgang Prock-Schauer said mid-May that the airline was working on a radical restructuring but did not go into details, which he said will be publicized in the coming months.
The airlines performance and restructuring in the coming two years are now crucial to its chances of longer term survival.
Regulators scrutinizing Etihad’s investment portfolio
Etihad is facing regulatory trouble not only concerning it’s involvement with Germany’s Air Berlin, but also with it’s other European investments.
Those are Swiss based Darwin Airlines, recently rebranded to Etihad Regional and Air Serbia (formerly JAT). The EU Commission has also said it would closely monitor any possible involvement of Etihad in Italy’s chronically loss-making Alitalia, which it has allegedly been mulling to merge with Air Berlin.
While Switzerland, which is Darwin’s home country, is not part of the European Union, it is still subject to previously mentioned EU ownership regulations through a treaty between the two entities. After a capital increase, the procurement of new aircraft and massive changes in the airlines route network as well as a rebranding to Etihad Regional, the EU has grown sceptical about the level of influence Etihad has over Darwin Airline.
Etihad was not yet able to leverage it’s involvement with Darwin because the Swiss BAZL has not yet approved it’s cooperation agreement with each other. The regulators have stated that this approval is directly linked to a review of foreign ownership and control at Darwin.
It is unclear what Etihad’s plans are with Darwin should they win the regulator’s approval.
Etihad has also purchased a 49% stake of JAT, which has subsequently been renamed to Air Serbia and received a complete fleet overhaul.
While Serbia is also not a member of the European Union, it is currently negotiating to join, which it hopes to do by 2020.
Air Serbia has recently announced plans to start long haul routes in fall 2015 to Chicago and Toronto. However, it is very uncertain to say the least if the US Department of Transportation will allow Air Serbia to move forward with this, as it has raised similar doubts about foreign ownership and control as the EU has raised over Etihad’s stakes.
Etihad had received a blow from the DOT earlier this year when a try was made to codeshare Etihad’s US flights with Air Serbia, an attempt that was foiled after a complaint from the American airlines due to unreasonable backtracking.
The DOT also said in it’s denial of the codeshare that Serbia did not have a bilateral Air Service Agreement, a situation that has not changed since.
Ultimately, the outcome of the diverse regulatory issues will determine which way Etihad will be going in the future. A clear decision against the legality of Etihad’s stakes could likely spell doom over several ailing carriers.
Note: Images courtesy of Etihad, Air Berlin and Air Serbia, respectively.