Lufthansa circles with intent as airberlin relies on government loan to continue flights during administration process

15 August, 2017

German carrier airberlin has become the second major European airline to file for insolvency proceedings after Gulf carrier Etihad Airways pulled the plug on its support refusing to provide further guarantees for its short-and medium-term commitments. This followed a similar process at Alitalia earlier in the year, another of the United Arab Emirates (UAE) carrier's equity investments in the European airline market.

airberlin says that in order to continue with its restructuring, it has filed the provisional insolvency proceeding at the local court of Berlin-Charlottenburg. Germany's Federal Ministry of Economic Affairs and Energy (BMWi) confirms airberlin will receive an emergency bridging loan of €150 million from its Kreditanstalt fuer Wiederaufbau bank to allow it to continue operations while the administration proceedings take place.

"We're in a time when many tens of thousands of travellers and vacationers are in multiple international holiday spots," Germany's Economics Ministry and Transportation Ministry said in a joint statement. "The return flights of these travellers back to Germany with airberlin would not have been otherwise possible."

Alongside the German Government, Lufthansa is supporting the restructuring efforts and in the process is ensuring that all aircraft that are currently operated by airberlin under a wet lease agreement for Eurowings and Austrian Airlines will continue operating as before.

The national carrier also confirms it is "already in negotiations" with airberlin to take-over parts of the airberlin Group and the administration may accelerate this process and enable the carrier to cherry-pick the assets it deems of value. It says it "intends to conclude these negotiations successfully in due time".

These discussions are reported to be at an advanced stage with at least one other airline also reported to be in talks to acquire some part of the airberlin operation. Germany's Transport Minister Alexander Dobrindt says he does not expect the likely sale of parts of airberlin to Lufthansa would raise antitrust concerns. airberlin's share of the German international market halved from 10.2% in summer 2016 to just 5.1% this summer, The Blue Swan Daily analysis shows.

"There is no transfer of airberlin as a whole to Lufthansa, there are parts of the business that will go to Lufthansa and there are interested parties for other bits of the business so we do not expect cartel difficulties," Mr Dobrindt told reporters, according to Reuters.

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Etihad describes the development as "extremely disappointing" for all parties, given that it says it has "provided extensive support" to airberlin for its previous liquidity challenges and restructuring efforts over the past six years including a €250 million funding injection in April this year while supporting the airline to explore strategic options for the business.

As Etihad notes, airberlin's business has "deteriorated at an unprecedented pace," preventing it from "overcoming its significant challenges" and from "implementing alternative strategic solutions". As such, it says, Etihad "cannot offer funding that would further increase financial exposure," but notes it is "open to helping find a commercially viable solution" for all parties.

"We expect airberlin operations to continue during administration. We have a commercial relationship with airberlin across a range of areas, including codeshare operations, and we will support airberlin's management during these difficult times," it says in a statement. "Germany is an important market for Etihad and Abu Dhabi, and we remain committed to providing comprehensive air links as a key enabler of trade and tourism."

airberlin has struggled to compete with Lufthansa and the growing numbers of low-fare entrants in the European market. It has accrued losses of around €1.2 billion during the last two years, bringing decade losses to more than €2.7 billion. Etihad bought a 29% stake in the business in 2012 as part of a plan to feed more passengers through its Abu Dhabi hub, but has failed to turnaround the airline in what is a highly competitive market.

A major recent restructuring that had considerably down-sized the airberlin business was always seen as a last chance to safeguard the future of the carrier, but with Etihad now turning off the investment tap even this was no longer sustainable.

The Blue Swan Daily analysis of OAG data shows that airberlin's summer 2017 schedule is a third smaller than last year with flight frequencies down 33.3% and network capacity down 37.9%. This is actually down 45.1% and 48.3%, respectively, on its peak year in 2010. This reduction in its activity has translated into a 16% decline in passengers over the first seven months of 2017, including a 24% decline in July 2017 versus the same month last year.

CHART - airberlin' summer network capacity (2010 - 2017)Source: The Blue Swan Daily and OAG

A CAPA - Centre for Aviation insights Analysis provides a detailed look at the latest developments at airberlin. The report says that given airberlin's long history of losses, "it is no surprise that it is filing provisional insolvency proceedings, particularly as Etihad has run out of patience and cash to support it."

It suggests Lufthansa has played "a canny waiting game" over a number of years and is now "well placed to cherry pick" those parts of airberlin's operation that suit it best without buying the whole loss-making enterprise.

READ CAPA - Centre for Aviation's Insight Analysis: airberlin files for insolvency. Lufthansa to cherry pick from its operation; easyJet also looking.