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Air Berlin, a basket case?

Air Berlin, a basket case? September 14, 2017Leave a comment

The airline business is never plain sailing. Airline bankruptcies are a fact of life, even in the better years and 2017 is no exception. As a whole, the airline industry is more profitable than it’s ever been. However, 2016 now appears to represent a high water mark. Cost increases for fuel, labour and maintenance are taking the edge off European airlines’ profits, which are expected to fall 14% to $7.4 billion in 2017 from $8.6 billion in 2016[1]. Yet costs vary hugely from carrier to carrier and increasing outlay – combined with downward pressure on fares from airline competition – will put the squeeze on those for which high costs were already an issue.

Step forward Air Berlin. Germany’s second largest airline, after Lufthansa, and Europe’s seventh largest by passengers carried flies to 52 destinations, mostly within Europe but with some long haul services to the Middle East and the Americas. It has 117 aircraft and maintains hubs at Berlin Tegel and Düsseldorf Airport. Listed on the Frankfurt Stock Exchange, Air Berlin’s largest shareholder is Etihad Airways, which increased its stake to 29.21% in 2011. However, on 15 August, after Etihad withdrew its financial support, Air Berlin stated that it was filing for insolvency. Flights are continuing for the meantime, largely thanks to a €150 million loan from the German government.

“Low cost”, high overhead

Why is Air Berlin in so much trouble? Whilst on the surface it markets itself as a low cast carrier, an analysis of its operating cost base reveals that it is anything but. We believe that the airline’s woes are largely the result of this uncompetitive cost position. To illustrate this, Aviation Analytics ran a cost comparison between Air Berlin and the cost leader in Germany, which unsurprisingly is Ryanair. The results bring Air Berlin’s problems into stark focus:

Ryanair vs. Air Berlin seat costs for a typical 2 hour sector (€ cost/seat)[2]

Ryanair (B737) Air Berlin (A320)
Airport Fees €4.74 €12.63
Handling Fees €2.03 €8.35
Fuel €15.70 €20.84
Direct Operating Costs €6.54 €9.19
Aircraft Standing Costs €8.43 €16.97
Overheads €4.20 €23.81
Total cost €41.63 €91.79
  • Fuel costs are the closest to one another (even here Ryanair has an advantage).
  • In all other areas Ryanair has a significant advantage.

Ryanair vs. Air Berlin network average costs (€ cost/seat)

Ryanair Air Berlin
Average cost €40.06  €108.49
Average revenue €52.08  €104.52
Average profit €12.02 -€3.97
  • Air Berlin has revenue per seat 2x that of Ryanair, which gives Ryanair a real opportunity to compete on price and take market share.
  • Once Ryanair expands in earnest Air Berlin will really start to lose money and this won’t be helped by the fact that Air Berlin has seats costs which are almost 3x that of Ryanair.

The most startling figure here is the €4 per seat that Air Berlin is losing. With 40 million seats in the market, the €150 million pledged by the German government will be swallowed up within a year at most – although, in reality, the airline probably wouldn’t survive the winter season, when yields are traditionally weaker.

The immediate future

Does Air Berlin have a future? The airline was already in the middle of a restructuring process, involving closing bases, cutting its fleet, redeploying aircraft to other Oneworld alliance members, concentrating on business travellers and focussing on fewer markets.

Immediately after it announced its insolvency, it seemed likely that the airline would be broken up. When Lufthansa swiftly announced that it was in negotiations to take over parts of Air Berlin, Ryanair cried foul, accusing the German government of “conspiring” to secure a Lufthansa monopoly. More recently, however, several candidates have emerged to buy Air Berlin as a whole. At the time of writing German investor Hans Rudolf Woehrl has tabled an €500 million offer, with other potential buyers having until 15 September to declare their interest.

If Air Berlin continues to operate, its new managers will have to take a cold, hard look at the business and focus on the areas where the airline can be competitive. One part of this would have to be a fundamental restructure of operating costs. In order to stand any chance in what is rapidly becoming an ultra-competitive market – our analysis shows that fares out of Germany have fallen 20% in the last 12 months – Air Berlin would need to halve its average seat costs to the €50-55 per seat bracket[3].

Any turnaround of Air Berlin would also certainty involve pruning its network. This is the subject of the next section of this article. As we will go on to demonstrate, two thirds of Air Berlin routes are loss making or strongly loss making. Should the airline collapse, its competitors will be able to cherry pick the most desirable routes and others will fall by the wayside. Whatever the outcome of the rescue talks, it will result in significant changes in the German market.

Winners and losers

Which airport directors can sleep soundly in their beds? Aviation Analytics estimated seat profitability on Air Berlin’s short haul international network, using our accurate accounts-derived seat costs and average fares from our in-house Low Cost Fares Database. The figures below cover the period January to August 2017 and include fully observed fares to the point of departure on all flights.

Air Berlin profitable short international haul destinations (€ profit/seat)

Kerkyra €30
Tel Aviv Yafo €26
Olbia €25
Madrid €16
Billund €11
Brindisi €8
Heraklion €8
Gudja €6
Kos €6
Reykjavik €6
Ibiza €5
Thessaloniki €4
  • Air Berlin’s best markets are Italy, the Eastern Mediterranean and the Nordics.
  • All seven profitable countries (Israel, Greece, Malta, Iceland, Italy, Finland and Denmark) are from those regions.
  • 10 out of 12 profitable destination are in those countries, as nine of the next 10 almost profitable (Rome, Catania, Florence, Helsinki, Milan, Salzburg, Copenhagen and Napoli).

Air Berlin 20 least profitable short haul international destinations (€ profit/seat)

Puerto del Rosario -€56
Tenerife -€55
Bucharest -€53
Arrecife -€52
Sofia -€50
Las Palmas -€49
Santa Cruz De La Palma -€42
Geneva -€40
Dubrovnik -€34
Budapest -€32
Funchal -€31
Stockholm -€30
Bologna -€28
Gdansk -€28
Agadir -€27
Paris -€25
Graz -€25
Warsaw -€23
Nice -€20
Zurich -€20
  • Eastern Europe is a problem for Air Berlin. Six of its 20 least profitable destinations are in Eastern Europe, as are two of the next five (Karkow and Prague). This can be put down to competition from both Wizz Air and Ryanair.
  • Spain and Portugal, France, Austria and Switzerland are also challenging. The Canary Islands are particularly problematic for Air Berlin because the longer sector length is not matched by a significant fare uplift.
  • 17 out of 20 of the least profitable destinations are in those markets, as all of the next five (Vienna, Alicante, Krakow, Prague and Barcelona).

Air Berlin’s destinations are clearly bifurcated: Italy, the East Med and the Nordics are profitable; Eastern Europe, Spain and Portugal, France, Austria and Switzerland are not. Only Madrid and Ibiza (profitable) and Stockholm and Bologna (unprofitable) buck these trends.

Of Air Berlin’s bases, the smallest, where Air Berlin faces little competition, are generally the most profitable, led by Westerland (€39 profit per seat) and Muenster/Osnabrueck (€36 profit per seat). Of the larger regional airports only Stuttgart comes close to being profitable (-€4 profit per seat). Cologne, a hotbed of low cost competition, is the least profitable (-€21 profit per seat).

Air Berlin 5 most profitable routes (€ profit/seat)

Westerland – Stuttgart €50
Stuttgart – Oliba €46
Munich – Oliba €45
Muenster/Osnabrueck – Palma Mallorca €36
Berlin – Kerkyra €32

Air Berlin 5 least profitable routes (€ profit/seat)

Paderborn – Las Palmas -€91
Hamburg – Puerto del Rosario -€86
Nuremburg – Puerto del Rosario -€84
Munich – Tenerife -€83
Paderborn – Puerto del Rosario -€82

It should be noted that these observations were taken during the airline’s restructuring process so it might be that some of the airport bases and routes were already earmarked for closure, although this seems to have come too late to save the airline.

Of course, the fact that an airport does not have an Air Berlin service does not mean it stands to be unaffected by the airline’s imminent collapse (or otherwise). A bankruptcy on this scale will send ripples across Germany and Europe. This could involve airlines redeploying aircraft from other routes, or moving from secondary to primary airports. Both Ryanair and EasyJet are known to be targeting the German market and this is their big chance. For example, Air Berlin’s demise would really shake things up at airports such as Dusseldorf where there is competition for slots. Similarly, it would accelerate Ryanair’s ongoing move from Frankfurt-Hahn to Frankfurt Airport. The Air Berlin story is another example of why it is essential for airport managers to be fully aware of the performance of their own and surrounding airline route networks.

Know where you stand. For average fares, seat costs and route performance for all Air Berlin (and other airline) routes, contact Jon Soars on +44 (0) 207 856 0159 or at jonsoars@aviationanalytics.com

[1] The International Air Transport Association (IATA) Press Release

[2] Costs based on a 189 seat B737 for Ryanair and a 180 seat A320 for Air Berlin, based on the most recent published accounts, adjusted for aircraft size and divided by the number of seats. Airport and Handling fees are airline average figures. Direct Operating Costs include maintenance and overflight charges, whilst Aircraft Standing Costs are the ownership and crew costs of the aircraft.

[3] We say good luck to them. In the last day, 13% of the airline’s pilots have reported “sick”, meaning that around 100 flights have had to be cancelled. The airline has accused the pilots of sabotaging the rescue talks.

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