Over the past 2 days, Lufthansa has been in formal talks with Air Berlin’s leadership regarding the sale of Air Berlin’s assets to LH. Though other bidders are expected to crop up including Ryanair, Thomas Cook and Easyjet, it appears that the battle for Air Berlin may be over before it even begins. While AB is publicly saying that it is possible that more than one suitor may be involved, it appears unlikely that a serious threat would be posed to LH’s chances at this point.
Already with an advantage thanks to the wet lease agreement currently in place for 40 AB aircraft, it looks as though Lufthansa will have little problem in taking over the lease on 90 of Air Berlin’s 140 aircraft, including the ones already under LH’s control.
Lufthansa is in solid win-win position at this point. Not only does it come through as a ‘Champion’ for keeping a German airline German, it will exponentially increase its Eurowings presence in Europe and the rest of world by immediately rebranding the AB birds into Eurowings and expanding their route network.
With German elections looming next month, it is also a fortunate public relations coup for the German gov’t by taking on an active role in bridging a €150 million loan to AB to remain solvent while the details of an LH take over are ironed out. Unlikely that the German gov’t at this point would support a sale of one of their flag carriers to Ireland’s Ryanair or an equally unattractive option in Easyjet, Thomas Cook, or others.
Earlier today, Air Berlin had done what most of us were expecting for some time when they filed for Bankruptcy protection. The filing came primarily as a result of Etihad’s withdrawing of any more funding to help keep the airline viable. Etihad had been a major stakeholder in ‘AB’ since January 2012.
The bankruptcy leaves Air Berlin in shambles as it is now left to scramble to either reorganize, sell off units, or simply cease operations. As it stands now, the German government has stepped in with a €150 million bailout that will keep Air Berlin operational for 3 months. During this time, ‘AB’ will be able to run as normal a schedule as possible, and ensure the employment of its 7,300 workers. This is especially important since we are in the midst of holiday travel season in Europe.
During this period, Lufthansa will continue business as usual as it relates to the 38 aircraft that it sublet from Air Berlin earlier this year in an effort designed to help AB regroup their operation.
Over the next weeks and months, suitors will emerge hoping to take over important gate space at airports where Air Berlin operates. Of course, with Berlin and Dusseldorf being the main hubs for AB, I suspected a heated bidding war to arise between the likes of Easyjet and Ryanair as they hope to make further inroads against Lufthansa on LH’s home turf.
Ryanair is already whining about LH having an unfair advantage due to all this happening in Germany, but Ryanair whines because it is what it does best when it doesn’t get its way.
Lufthansa has stated that it expects to compete successfully for the Air Berlin business due to its ‘home field’ advantage and its existing relationship with Air Berlin. In fact, LH is already in talks with German and Air Berlin officials to craft a way forward that minimizes the impact of a complete shut down of Air Berlin.
Call it luck or brilliance, but Lufthansa appears to have played Air Berlin perfectly. LH did not spend much time, money, or manpower to take on Air Berlin directly with their Eurowings unit. Instead they saw the writing on the wall several months ago and waited patiently for their opportunity to arise. Along the way, they offered help to support their fellow ‘countryman’, knowing full well that AB did not have a chance at survival and that Etihad would pull it’s life line from Air Berlin. Now in the end, Eurowings is most likely to be the biggest benefactor and should see an exponential increase in size and presence in Europe’s Low Cost Carrier market. Much to the chagrin of RyanAir, Easyjet, and others.
After comments made last week by Lufthansa’s CEO Carsten Spohr, it appears that Lufthansa is putting together a strategy that would allow it to absorb Air Berlin into Eurowings. After years of struggling, and failed subsidies/investments by Etihad, it appears that Air Berlin is on life support and without intervention, could simply fade away.
Spohr, speaking before the Lufthansa Group Annual Shareholder’s Meeting, stated 3 criteria would need to be met before Lufthansa would feel comfortable writing a check for Air Berlin. Specifically he addressed:
- Air Berlin’s debt level of 1 BILLION Euro and a debt ratio of 4.5:1 makes it a VERY EXPENSIVE acquisition if LH were to acquire the liability. Spohr suggested that if Lufthansa were to be interested in acquiring ‘AB’, the debt would have to be assumed by Etihad (Air Berlin stakeholder), or be disbursed by some other means before AB would be welcomed to the LH Group. LH simply would refuse any deal that would involve assuming any of the debt
- Anti-Trust Concerns from the EU would overshadow any thought of the acquisition. Not only on a continental EU level, but also intra-Germany, since an AB acquisition by Lufthansa would leave Lufthansa as the only major airline within Germany. Knowing the EU’s political leanings, it would be foolish to think that they would award a monopoly to Lufthansa. This issue would create an opportunity for RyanAir or EasyJet to swoop in with proposals for Air Berlin which could be disastrous for Lufthansa. After all, who wants RyanAir or EasyJet operating in their neighborhood. Air Berlin joining Lufthansa would also lead to Air Berlin’s exit from OneWorld.
- Before any deal would take place, Air Berlin would also be required to reign in their costs. Progress is being made, but Air Berlin is not near being profitable, and again, Lufthansa has indicated that it does not want to inherit any liabilities should they decided to bid for Air Berlin.
- Assurances would also need to be made for Air Berlin staff. Any merger would almost certainly guarantee a significant amount of staff overlap and with worker protection laws in Germany being the way they are, Lufthansa will not be able to simply layoff unnecessary workers. AB employs approximately 8500 people and accommodations would need to me made for those at risk of losing their jobs as a result of a merger.
Should LH find a way to navigate the regulatory gauntlet, and get others to take the liability left behind by Air Berlin, it would be an obvious coup for Lufthansa. Considering that LH’s main focus over the last 3 years has been to build an LCC product that can take on, and beat the likes of RyanAir and EasyJet at their own game, plugging Air Berlin into Eurowings would catapult LH to the forefront of LCC operations in Europe. The only problem is that Europe’s politics and Lufthansa’s competitors will do everything possible to keep Lufthansa from realizing that success.