Reuters has reported that talks may have taken place between Lufthansa and Alitalia about the prospects of Lufthansa taking a substantial stake in Italy’s national carrier. The main topic of the conversation may have been regarding Etihad looking to give Air Berlin to Lufthansa in return for a stake in Alitalia.
Etihad currently owns a 49% stake in Air Berlin and a 29% stake in Alitalia and both investments are slowly becoming disasters for Etihad. So much so that Etihad signed off on the Air Berlin deal to let Lufthansa lease 40 aircraft and take over a substantial part of Air Berlin’s routes while Air Berlin tries to fix its woes.
According to the article, Alitalia management denied that any talks have happened but what are they supposed to say? Yes? We did and Lufthansa is going buy a large piece of us and we’re going to throw in Air Berlin as a door prize? How many times have discussions been denied only to become fact a short time later.
It’s an interesting 3-way deal that may be brewing between Rome, Frankfurt and Abu Dhabi. Etihad sees 2 major losses on the horizon with Air Berlin and Alitalia, and sees a way out of almost both problems by giving away Air Berlin to Lufthansa in turn for Lufthansa taking a stake in Alitalia.
My gut suggests that a complete take over of Air Berlin by Lufthansa would simply solidify their Eurowings unit as one of Europe’s largest Low Cost Carriers (LCC) without Lufthansa having to grow the brand organically from within. Considering Air Berlin’s dire financial straits, LH could steal the airline for a song.
But of course, these conversations never happened 😉
What we knew would happen for weeks has become official. Lufthansa has entered a Letter of Intent with Air Berlin to assume a wet-lease for 40 Air Berlin aircraft, complete with Air Berlin crews to operate the flights. The aircraft will enter service on March 26, 2017, coinciding with the beginning of Lufthansa’s Summer timetable. 35 of the aircraft will be repainted to the Eurowings livery, while the remain 5 will fly under Austrian’s colors. Specifically, the lease involves 29 Airbus 320 and 11 Airbus A319 aircraft.
The decision was made after Lufthansa approached Air Berlin with an offer to help reduce some of the stress that Air Berlin is under due to mounting losses. Of course LH was not completely altruistic with the offer since there would be a substantial benefit to Eurowings, both in the growth of the fleet and the reduction of competition in the German LCC market.
Lufthansa will operate the aircraft on existing Air Berlin routes except those that serve Dusseldorf or Berlin. Air Berlin will continue to operate out these major hubs. However I do expect that a few tweaks will be made to the timetable to take into account existing routes already being flown by Eurowings.
Under wet lease agreements, the operating airline pays ‘rent’ for the aircraft and assumes all other responsibilities for the aircraft including maintenance etc. Any profits or losses remain with the airline leasing the aircraft, obviously in this case it is Lufthansa.
The ‘Letter of Intent’ announcement came from the Supervisory Board of the Lufthansa Group. The board held a regularly scheduled meeting on Wednesday (28 September) to discuss various proposals and strategy initiatives. Another major announcement that came from the Board was the approval for the Lufthansa Group to purchase the remaining 55 percent stake that it did not already own in Brussels Airlines.
Over the past few weeks it was quite obvious that Air Berlin was in ‘perilous peril’. News starting coming from Germany that Etihad was no longer happy with their stake in Air Berlin and was even looking at ways to divest of their ‘mistake’. At the top of most headlines was the fact that Lufthansa was prepared to take advantage of AB’s weakness and takeover aircraft and routes while Air Berlin restructured their operations.
With the latest news from Germany on Monday, we now gain clarity and confirmation of what has been discussed previously.
People in Europe were waking up to headlines that Air Berlin indeed will be restructuring operations in an attempt to return to profitability. Leading the list of changes is the elimination of over 1,000 jobs and reduction of its fleet of 127 aircraft to only 70 by the end of this year.
To dovetail this announcement, Lufthansa has been planning for this and had previously offered to assume control of 40 of Air Berlin’s aircraft and operate most of the Air Berlin routes that do not serve Dusseldorf or Berlin, both of which are major AB hubs. LH will ‘wet lease’ the aircraft and crews from AB and will operate them under ‘Eurowings’, LH’s Low Cost Carrier unit. What this means is Air Berlin is guaranteed to receive ‘rent’ for the aircraft, but Lufthansa gets to keep profits, or absorb losses.
In addition to the aircraft that Lufthansa will take over, it appears that Air Berlin will also sell 17 of their birds currently owned by ‘Niki’ to TUIFly. ‘Niki’ is an Austrian based subsidiary of Air Berlin.
The timing of the implosion of Air Berlin couldn’t have happened at a better time for Lufthansa. At the top of LH Group’s priority list for 2016 was to make sure that Eurowings would be set up for success and become accretive to Group’s balance sheet. So far success has been muted for a variety of reasons including the fact that the fleet is a bit undersized, uber aggressive competition from competitors, and a change in consumer sentiment in Europe that has fewer people thinking about travel.
With the injection of 40 aircraft, new routes, and broader coverage Lufthansa has the opportunity to make Eurowings what it is supposed to be, which is a low cost option for passengers to travel to destinations not usually served by mainline carriers. At this moment, Eurowings only has 33 aircraft in the fleet making it difficult to reach their goal. With the influx of 40 new aircraft, crew and hundreds of new flights, EW will have literally doubled in size over night without much effort or substantial risk.
Eurowings now has the opportunity to finally meet the expectations that everyone had for it. However the expectations may have doubled as well!
Lufthansa Group’s Supervisory Board is scheduled to meet Wednesday, September 27 to review and vote on the proposal for bailing out Air Berlin. It’s expected to be approved unanimously so expected another announcement in the coming days that confirms what we already know.
What has been rumored and speculated for the past several weeks is set to become fact and reality. Lufthansa is poised to take over 40 of Air Berlin’s aircraft at at the same time take over approximately one-third of Air Berlin’s routes.
The decision is expected to be made at the upcoming LH Supervisory Board meeting scheduled for later this month and it is fully expected that the board will rule in favor. The timing works out well because this will allow Lufthansa to time the ‘take over’ of the routes and aircraft with the beginning of the Winter Timetable that takes effect on October 31. These flights will operate under LH’s Eurowings LCC division, and no, the aircraft will not be repainted to match EW or LH liveries!
This does not affect Air Berlin’s operations in Dusseldorf or Berlin. Flights to and from those cities will continue to be operated by Air Berlin.
Why is Lufthansa willing to do this?
Well, it’s basically taking a bullet for Air Berlin and trying to build out Eurowings at the same time.
Air Berlin is bleeding money faster than it can make it, and it’s Mid-Eastern overlord, Etihad, is becoming growingly impatient with operating results after making a substantial investment into AB’s business. If Air Berlin continues its current path, it faces no option other bankruptcy and being thrown on the pile of other failed European LCC airlines.
Lufthansa almost has no choice but to enter this unholy alliance with Etihad to help save Air Berlin. Otherwise, should Air Berlin disappear, the vacuum that would be created would suck in competitors such as Ryanair, EasyJet, Norwegian, etc. to fill in the void left by Air Berlin. Lufthansa is simply playing defense to protect their own market. As strange and unorthodox as it may appear, it is actually LH’s only choice if it doesn’t want to see even more foreign competitors flying in and out of German airports. At the same time, Eurowings is not big or successful enough to take on any void left by AB, so Lufthansa needed to step up and help cushion what appears to be the imminent failure of Air Berlin.
Should AB fail, at least Lufthansa is there to catch the pieces and immediately increase the size of Eurowings with the demise of AB. Lufthansa has said all along that Eurowings would be used to absorb other Euro LCCs should any of them be at risk of failure. Air Berlin will simply be the first airline to test LH’s experiment.
In news out of Germany in the last several hours, it appears that Lufthansa is a little bit more than serious about acquiring routes and aircraft from a struggling Air Berlin.
In a potential deal between unlikely bedfellows, Lufthansa is in discussions with AirBerlin’s main stake holder, Etihad, about the prospects of acquiring upwards of 40 aircraft and a majority of routes that are not operated in or out of AB’s hubs in Berlin and Duesseldorf. The acquisition would also include the crews for the aircraft.
Air Berlin currently operates 148 aircraft, so any acquisition would be a major one, since it would cut Air Berlin’s fleet by 27%. But this kind of a deal would also take the sting out of AB’s balance sheet which has hemorrhaged $1.29 BILLION in losses over the last 3 years.
The aircraft and routes would be assigned to Lufthansa’s Eurowings ‘Low Cost Carrier’ division and would immediately grow market share by eliminating the AB competition on the routes. This also plays well in Lufthansa’s plan that seeks to grow Eurowings by 25-30% in the coming year.
The one fly in the ointment will be the anti-trust fears that Germany and the EU will have. Historically, Germany and/or the EU have not looked favorably at deals that potentially reduce competition in the marketplace. But on the other hand, the real threat exists for the loss of thousands of jobs and the failure of an airline.
Not that the EU has made any good decisions lately, but here’s a chance for them to not screw something up! 😉
It would also be a welcomed jab at the ME3 who have been dumping capacity into Europe thanks to their subsidized operations, but I digress…….