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Analysis: Air Berlin Was Always a Lost Cause

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Analysis: Air Berlin Was Always a Lost Cause

Analysis: Air Berlin Was Always a Lost Cause
October 10
11:12 2017

BERLIN – Troubled German carrier, Air Berlin, will end operations October 28, casting serious doubt on the future of its more than 8,000 employees.

The Berlin-based low-cost carrier (LCC), also Germany’s second largest airline and Europe’s tenth largest, is currently in negotiations with a group of bidders that includes Lufthansa Group and easyJet for a sale of company assets.

However, according to Air Berlin representative, Frank Kebekus, even a potential sale is no guarantee of job preservation. According to Kebekus, at least 1,400 Air Berlin employees, mainly comprised of ground and administration staff, might lose their jobs during the acquisition.

The downfall of Air Berlin has been swift and sudden. After years plugging along as a minority subsidiary of Middle Eastern giant, Etihad (which became Air Berlin’s largest shareholder in December 2011), the Abu Dhabi-based carrier withdrew its ongoing financial support on August 15, 2017.

This triggered a bankruptcy filing on the same day and set off what amounted to a death spiral. By September 11, route cuts began in earnest with Caribbean flights to be canceled as of September 25, 2017.

By the time September 25 rolled around, the long-haul cuts got much deeper. At that point, aircraft lessor AerCap, from whom Air Berlin leased its fleet of Airbus A330-200s, decided to repossess all ten of the carrier’s A330s, forcing the cancellation of all long-haul flights by October 15.

And now, Air Berlin will be canceling all flights operated under its own brand and AB flight numbers. This isn’t quite the end of the company as a whole since wet-lease operations on behalf of Eurowings, and Austrian Airlines will continue unabated.

In total, these operations amount to 28 A320 family jets (17xA320, 11xA319) operated for Eurowings and 4 A320s operated for Austrian Airlines. Additionally, wholly-owned subsidiaries Luftfahrtgesellschaft Walter (LGW) and Niki will continue to operate.

LGW is a German regional carrier based at Dortmund that flies a fleet of 20 Bombardier Dash 8 Q400 turboprops on most domestic routes. Meanwhile, Niki is an LCC based at Vienna with a fleet of 31 aircraft (17 of its own) serving 50 destinations across Europe and North Africa.

So this shutdown of core operations doesn’t quite mean the end of Air Berlin as an entity. But its days as a major European standalone carrier are done.

The Air Berlin experiment was doomed by the early 2010s


While Air Berlin’s demise has been an extended and drawn out process with multiple years as the proverbial “sick man” of European airlines, the carrier’s business model has been doomed from the start.

Put simply, Air Berlin is an LCC without low costs – which is a model that simply cannot be sustained. Because of its hub structure and short-haul product offering, it has to compete with the Ryanair and easyJets of the world on pricing.

But because it has long-haul operations to feed and an older, unionized employee base, it cannot match those airlines on a cost basis. This is the recipe for the hundreds of millions of Euros that the carrier has lost since 2007 (after it completed the LTU merger and the dba purchase).

Moreover, the European and German markets are simply not configured for successful airline turnarounds. This is a lesson that Etihad has learned the hard way with both Alitalia and Air Berlin – you simply cannot make the kind of structural cost reductions required to turn a European carrier around.

Thanks to a combination of government intervention on a political basis, incredibly strong unions and work councils, and the higher structural cost of doing business due to a higher degree of business regulation, European economies are not the ideal environment for executing turnaround plans.

In comparison, if Air Berlin was in the United States, it could have used Chapter 11 bankruptcy to re-structure, shed its high structural costs, reduce employee costs, and renegotiate its leases. In that kind of environment, you can get the sort of cost reduction necessary for turning around a situation the likes of Air Berlin’s. You largely cannot within the EU.

And to be fair, EU citizens may well prefer to have strong unions, high taxes, and strict regulations – that is a valid position to hold. But an unavoidable side effect of an economy structured in that manner is a reduction in dynamism that makes turnarounds of this scope nigh upon impossible.

Buyer beware


Within that context, the emergence of Lufthansa and easyJet as the preferred bidders is no shock. In both cases, the driving factor is arguably Ryanair, which is now making a strong push into primary German airports (and which has lower market penetration in Lufthansa Group hubs than it does in other markets).

For Lufthansa, it’s about keeping Ryanair from gaining a substantial toehold in Germany’s third (the Rhine-Ruhr metropolis encompassing Cologne, Dusseldorf, Dortmund, and Bonn) and fourth (Berlin) most important air travel markets, and bolstering its own attempt to build an LCC within an airline (Eurowings).

Eurowings has not been a financially successful experiment to date, but Lufthansa seems committed to making the bet. With that in mind, Air Berlin makes a lot of sense as an acquisition.

For EasyJet, it’s also about gaining that toehold in Germany against Ryanair in important markets. Reports, however, indicate that it only wants Air Berlin’s Berlin hub and some 30 Airbus A320 jets, leaving Dusseldorf and the other pieces of Air Berlin’s network to other buyers (or a swift yet painful death).

Thus, for Air Berlin’s employees, the Lufthansa acquisition would be strongly preferred because it would preserve more of the company’s operating structure (it would be a merger, as opposed to the addition of a base to an existing airline).

Because of that, my view is that Lufthansa has a slight lead in the process here (they may also be willing to pay more for the combined operation and lock EasyJet out), but easyJet can still overcome that and take Berlin away.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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