Issue no. 196 May 2014 airberlin: an airline in search This issue includes of a strategy Page a company menons the words “going concern” more airberlin: re-engineering 1 than once in its annual report, it usually a lile concerning. W The fact that airberlin, Germany’s second largest airline, felt India’s LCCs struggle through the need to use the phrase a dozen mes in its 2013 report (twice as tough mes 6 many as in the previous year), without even once menoning its aircra Indigo ........... 8 order backlog, may perhaps suggest that it has become necessary for SpiceJet .......... 9 the directors to convince themselves and the auditors of the fact. GoAir ............ 10 The company’s annual report 2014 do not make much beer read- Air India Express ...... 11 does not make pleasant reading. In ing – although to be fair this is the JetConnect ........ 12 the year to end December capacity weakest period of the year and this fell by 5% as planned but passenger year the period did not include Easter. Gol’s raonalisaon and numbers declined by 5.5% to 32m. The number of passengers fell by 1% revenue management Revenues dropped by nearly 4% (with but capacity had grown by 4%; the efforts pay off 13 a 5% decline in cket sales) to €4.2bn load factor fell by 4 points to 82%. while published operang results Published operang losses improved slumped to a loss of €232m, against a slightly to €182m, which prompted profit of €70m in the previous year. the company again to state that its The latest cost saving programme Turbine programme is working (the enues down by 4% (and cket sales (under the soubriquet “Turbine”) is aim is to generate a cumulave re- were down 5%). Net losses swung in said to have generated over €200m ducon in running costs of €400m at €210m compared with €196m in in cost savings, but the underlying by the end of 2014). Unit costs fell the prior year period. As a result the EBITDAR margin slipped 2 basis by 8% but yields were down 4% and negave equity on the balance sheet points to an unsustainable 9% – the unit revenues by 8% giving total rev- worsened to just short of €400m. lowest level since 2003. Moreover, the €232m loss is stated aer non-recurring excep- Air Berlin plc Financial Performance 5,000 200 onal income of €60m, relang to Costs profits on asset sales and indemnies 4,000 100 (in the previous year the company Revenues had recorded a profit on the sale of 70% of its frequent flyer plan to 3,000 0 €m Ehad). €m Reported net losses came in at 2,000 -100 €316m compared with a reported €7m profit in 2012. On the balance 1,000 EBIT -200 sheet the company reported negave equity of €186m and a cash posion 0 -300 of only €223m, a paltry 5% of annual 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E revenues. The results for the first quarter of Source: Company reports, AS analysis Published by Aviation Strategy Ltd Aviation Strategy Air Berlin plc Share Price ISSN 2041-4021 (Online) 22 This newsleer is published ten mes a year 20 by Aviaon Strategy Limited Jan/Feb and 18 Jul/Aug usually appear as combined issues. 16 Our editorial policy is to analyse and cover contemporary aviaon issues and airline 14 strategies in a clear, original and objec- 12 ve manner. Aviaon Strategy does not € shy away from crical analysis, and takes a 10 globalperspecve–withbalancedcoverage 8 of the European, American and Asian mar- 6 kets. 4 Publisher: 2 0 Keith McMullan 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 James Halstead At the same me as the publi- the perpetual bond can be treated as Editorial Team caon of the annual results (delayed equity on the balance sheet and thus Keith McMullan a month as the company no doubt can be seen to offset the exisng neg- [email protected] debated the queson of whether it ave equity. The conversion terms on James Halstead was a “going concern”) airberlin an- the bond (at the equivalent of €1.79 [email protected] nounced an emergency recapitalisa- a share) would potenally give Ehad Heini Nuunen on. Major shareholder Ehad had a 70% stake in the company – well [email protected] Nick Moreno agreed to inject a further €300m in above the 49% limit for non-EU na- [email protected] the form of a perpetual payment-in- onals. kind converble bond and extend its The company recognises that the Tel: +44(0)207-490-4453 Fax: +44(0)207-504-8298 exisng shareholder loan of $255m Turbine programme is not going far (ofwhichlessthan$100mdrawn,and enough and has created a new po- Subscriptions: due to expire in 2016) by five years. sion on the management board of In addion, the company announced a Chief Restructuring Officer to pur- [email protected] the issuance of a new €250m se- sue a new restructuring programme, Copyright: nior bond (€100m of which is to re- while stang that Ehad would “fur- ©2014. All rights reserved deem exisng debt). Because of the ther support airberlin and help the peculiaries of accounng standards, business restructure and return to Aviaon Strategy Ltd Registered No: 8511732 (England) Registered Office: airberlin Group Fleet 137-149 Goswell Rd 180 757/767 London EC1V 7ET F100 5 7 160 10 10 VAT No: GB 162 7100 38 7 ISSN 2041-4021 (Online) 737Classic 10 13 14 10 140 7 E190 13 14 The opinions expressed in this publicaon 2 3 10 Q400 120 10 donotnecessarilyreflecttheopinionsofthe 13 14 A330 12 3 65 68 100 3 editors, publisher or contributors. Every ef- 64 57 fort is made to ensure that the informaon 46 737NG 80 17 51 contained in this publicaon is accurate, but 47 no legal reponsibility is accepted for any er- 60 2 rors or omissions. The contents of this pub- 41 10 40 licaon, either in whole or in part, may not 76 71 67 56 60 63 A320 be copied, stored or reproduced in any for- 20 15 42 mat, printed or electronic form, without the 15 wrien consent of the publisher. 0 2006 2007 2008 2009 2010 2011 2012 2013 2 www.aviationstrategy.aero May 2014 airberlin Capacity, demand and load factors hubs in Europe are somewhat ques- 90 90% onable – and had a burgeoning do- Load Factor 80 mesc and intra-European City Shut- tle service. 70 80% In quick succession it acquired 60 dba, to become the second largest 50 ASK 70% German scheduled carrier and a contender to Luhansa, and 40 RPK Düsseldorf-based LTU, a charter 30 carrier with an extensive long-haul 20 operaon (both acquired airlines 10 were financiallly very weak), hoping to become a grown-up intercon- 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 nental player and described itself as a hybrid scheduled and leisure carrier. sustainable profitability”. Ehad has scheduled operaons. When it came By 2008 it had grown to carry 30m apparently placed two execuves in to the markets in its IPO in 2006 it passengers a year and had plans to the business (James Hogan, CEO of sold itself on the basis of being a low connue to grow strongly. Ehad and his CFO already sit as non- cost carrier (that being the flavour of Since then growth has faltered. execuve directors on the board) and the month). At the me half of its The number of aircra in the fleet hired a management consultancy to services were sll on charter oper- reached a peak in 2010 at 169 units “re-engineer airberlin”. aons from German regions to the and has since fallen to 140. The num- Hogan is nothing if not consis- short haul leisure desnaons in the ber of passengers carried peaked in tent – exactly the same strategy is Mediterranean. It had built a hub op- 2011 at 35m 11% higher than in 2013. being applied to similar crises at Jet eraon in Palma to funnel demand Total capacity in ASK in 2013 was 1% Airways, Ehad’s Indian investment – from the disparate German regions higher than five years ago, although it see page 12. onward to Spanish leisure desna- has been able to improve load factors Re-engineering necessary? ons – although short haul transfer by 6.5 points over the period and de- airberlin should be in a relavely airberlin Balance Sheet Analysis strong posion. It is the second largest carrier in Germany (the €m 2013 Q1 2014 Net bond issues Proforma largest outbound tourist market in Equity (186) (399) 300 (99) the world) and with 32m passengers Intangible Assets 416 414 414 carried a year the seventh largest Adj shareholders’ funds (602) (813) (513) airline in Europe. It is the largest Long term debt 784 860 150 1,010 operator in Berlin, Düsseldorf and Short term debt 235 214 214 Palma de Mallorca. It has seemed to Cash 223 273 450 723 have had a relavely cosy duopolisc Cash % revenues 5.4% 6.6% 17.4% relaonship in its key German speak- Net Debt 796 801 501 ing markets (Germany, Austria and Debt/CE 1.22 1.59 1.25 Switzerland) with Luhansa – which Debt/Adj CE 2.44 4.12 1.72 has been relavely happy to have Capitalised rentals 4,634 4,101 4,101 airberlin help keep out the European Debt†/CE 1.03 1.08 1.02 LCCs. Up to now however, its strategy Debt†/Adj CE 1.12 1.19 1.11 has appeared confused.