MIAMI — European hybrid carrier and oneworld member Air Berlin will enact a wide-ranging restructuring program, shrinking its fleet and route network, and handing over routes and aircraft to competitor Lufthansa in an effort to stem losses on its short and medium haul route network.

Under the program, Air Berlin will shrink its business to focus on its hubs in Berlin (Tegel) and Dusseldorf, with a core fleet of 75 aircraft while wet leasing up to 40 aircraft to the Lufthansa Group and abandoning routes in other focus cities to be taken over by Lufthansa’s low-cost subsidiary Eurowings.

Roughly 1,200 out of the current 8,600 staff of the airlines will be let go, and Air Berlin’s other leisure focused routes including Vienna-based subsidiary Niki will be spun off into an independently operating business unit. This leisure focused business will also encompass most tour packages and one-off charters.

The fleet moves that will be enacted to enable this restructuring are interesting to say the least. The Air Berlin fleet currently consists of 127 aircraft, split as 80 Airbus A320 family aircraft (6 A319, 53 A320, 21 A321), 14 Airbus A330-200 widebodies, 16 737 NG aircraft (5 737-700, 11 737-800), and 17 Bombardier Dash 8 Q400 turboprops.

The new plan is for Air Berlin’s core operations at the Dusseldorf and Berlin hubs to be flown by 18 Q400s (adding one to the fleet), 17 A330-200s, and 40 A320s. Meanwhile, all of the A319s and A321s, as well as 13 A320s will be wet leased to Lufthansa in an arrangement where Air Berlin will continue to operate the aircraft beginning by the IATA northern summer 2017 season.

The 16 737NGs will be merged with Niki’s 18 Airbus A320 family aircraft (5 A319s, 12 A320s, 1 A321) to form the so-called tourist business unit.

A no-brainer for Lufthansa that reshapes German aviation in their favor

From Lufthansa’s perspective, this deal is an absolute no-brainer, as it eliminates a competitor to Eurowings and Lufthansa in numerous secondary markets and even Munich and Zurich. The specific airports that will see a payoff for Lufthansa include Eurowings base Hamburg, where Air Berlin serves 11 year-round nonstop destinations and 12 more on a seasonal basis.

Stuttgart (11 & 13), Zurich (12 & 15), Cologne (10 & 6), and Munich (13 & 26) are also all Eurowings or Lufthansa Group hubs which will see a sharp reduction in competition to the tune of more than 15 nonstop routes from airberlin.

The Eurowings experiment for Lufthansa has struggled thus far financially in the wake of severe competition from European low cost carriers (LCCs). This has been accompanied by a general financial malaise at the overall group level due to Europe’s economic woes and troublesome labor relations. But the acquisition of these new forty aircraft, and what should amount to more than 100 routes is a no brainer that can only help Eurowings’ financial results by virtue of eliminating a competitor.

If Lufthansa is committed to the Eurowings experiment, and we are not sure whether it should be, then building more scale and all but eliminating its chief German competitor is probably a good way to position that experiment with the best chances of success.

The one open question is whether the market concentration Lufthansa Group will now have in Germany will trigger any sort of antitrust review from the European Union. Still, as compared to last week, Lufthansa’s management team will wake up on Friday morning with a stranglehold on Western European aviation (thanks to the acquisition of Brussels Airlines) and one less competitor in most of its German bases).

Etihad is dealt a valuable lesson

Fundamentally, Air Berlin was not an airline positioned for success. The unholy alliance between Air Berlin, Niki, dba, and LTU was always a hodgepodge of low-cost and full-service business principles with a short haul business that purported to be a low cost operation but was increasingly saddled with a legacy airline’s cost structure.

The operation itself was a mix of hub-and-spoke (at Dusseldorf and Berlin) to feed long haul flights and point to point (at Palma, Munich, and all of the other bases) as part of the carrier’s low cost roots. This mixed-market business model was doomed to financial failure from the start, and no seasoned observer has been surprised at Air Berlin’s financial woes.

But this restructuring is also a cautionary tale for exuberant Middle Eastern giant Etihad Airways, which has crowed proudly about its so-called equity alliance of airlines around the world. Air Berlin was one of the original test cases for Etihad’s group of airline investments, with the Abu Dhabi-based carrier having invested 73 million Euros in December of 2011 to increase its stake in airberlin from 2.99% to 29.1%.

More than anything, Air Berlin’s current predicament is a reiteration that contrary to Etihad’s beliefs, unlimited funds are not a miracle cure to every airline’s woes. For every Aer Lingus or Air Serbia where the cash infusion generates positive business momentum or even a turnaround, there’s an airberlin or Alitalia where the money ends up having been poured down the drain.

Etihad’s equity alliance has undoubtedly hit a rough patch, and Alitalia is probably next.

As far as what this means for Air Berlin itself, we are not optimistic about the carrier’s future. Sensibly at least, the carrier has finally split its hub and leisure operations into separate entities, and may well close down the distracting TUIfly deal by handing over Niki and the entire leisure operation to TUI Group. It’s not clear that what’s left, a sort of full service carrier hubbed at cities that are a distant third and fourth in Germany in terms of hub desirability, has a path to long run sustainability.

Air Berlin claims that its long haul network is currently profitable which is believable given that the long haul routes have positive exposure to the much healthier United States market and that current the price of fuel makes almost any route profitable. But the short and medium haul operations will still suffer from the same shortcomings that Air Berlin used to have with really only a reduction in operational complexity serving as a headwind.

It’s possible to spin a story where Air Berlin manages to force through deep cost cuts (unlikely in a European labor environment), becomes highly efficient, consolidates and focusing on dominating Berlin and winning corporate travel in the economically powerful Ruhr region via a Dusseldorf hub. If you can make all of those pieces come together and Europe’s economy cooperates, then perhaps Air Berlin has a viable future. But at this point, that series of events seems highly unlikely.