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.
Austrian Airlines on March 7 introduced the first wet-leased Air Berlin A320 into service for Lufthansa Group. The aircraft, D-ABZA, flew in Austrian colors from Vienna to Skopje. D-ABZC entered service for OS in March 8.
D-ABZA and D-ABZC are the first 2 of 5 Air Berlin aircraft that will operate for Austrian. Under the wet-lease agreement, the aircraft will carry OS colors, however the crew that you will see aboard the plane will be dressed in their Air Berlin uniforms since technically the employees are on lease from Air Berlin.
D-ABZA shows off her new Austrian Colors. Photo courtesy of Austrian Airlines.
This opportunity for Austrian to expand their fleet and reach comes after Lufthansa agreed with Air Berlin to sublet 40 Air Berlin aircraft in order to help Air Berlin restructure their operations in an attempt to return to profitability. Air Berlin’s key investor, Etihad, was instrumental in working with LH to make the deal possible.
D-ABZC in her old AB colors…..
Most of the 40 aircraft will be painted in LH Group’s Eurowings livery and will be deployed on routes that EW normally serves along with a few new additions thanks to having an airport full of new planes to deploy.
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.