Air Berlin to drop long-haul operations?

In a major strategy reversal that could have repercussions throughout the dynamic German market, Air Berlin is looking at cutting back and perhaps dropping its new long-haul operation.

Air Berlin, traditionally a short-haul low-cost carrier with a mix of scheduled and leisure operations, expanded into the long-haul market after taking over LTU last August. In a further push into the long-haul market Air Berlin also agreed last September to buy Condor from Thomas Cook in a two-phase deal which would give Air Berlin a 75% stake in Condor in early 2009 and a 100% stake in early 2010. But German competition authorities have not yet approved the Condor acquisition and in late May extended its inquiry into the deal until at least October. Some analysts believe the deal could be dropped or re-negotiated as Air Berlin takes a hard look at its new long-haul strategy.

"It is clear that the company is considering a withdrawal from long-haul operations, including both business and leisure routes," says ABN-AMRO analyst Andrew Lobbenberg. "We imagine Air Berlin may be seeking to negotiate the transfer of long-haul operations into Condor. Given the intimated withdrawal from long-haul, the Condor deal would no longer appear relevant."

After reporting a €59 million ($91 million) net loss for the fist quarter, Air Berlin chief executive Joachim Hunold confirmed in a conference call with analysts last week that it is now undergoing a major review of its network and "that we may change our long-haul strategy". But he refused to comment on whether it was seeking to renegotiate the deal with Thomas Cook because the inquiry by German competition authorities is still pending.

Hunold acknowledges "certain things could or may happen on the long-haul side" but told analysts to wait until it has a chance to complete a review of its route portfolio: "Our current long-haul operation is under evaluation, and that could be that we also discuss about our strategy on the long haul, but we haven't finalised our thoughts on this. I would say, currently for us, nothing is a holy cow.

"What we are currently trying to do is evaluate our route portfolio on the profitable side, but on the other side, we have to see the strategic aspect over the future and give this some weight. You cannot do it in two to three days. You have to take your time, and we want to take our time to do a precise and organised plan to match the increased fuel cost."

Air Berlin says the current review should result in the carrier dropping a slate of unprofitable routes from the start of its winter schedule on 1 November. The network changes are part of a package of measures designed to offset fuel prices and ensure an operating profit for the full year despite the high cost of fuel.

It is clear long-haul routes will be more impacted than short-haul routes because Air Berlin says short-haul routes within Europe continue to perform well and are doing even better than last year. Even though intercontinental routes achieved an 88% load factor in the first quarter, with 460,000 passengers carried, Air Berlin acknowledges in financial terms they performed "very poorly". It has already unveiled plans to cut two of its five weekly flights on the Dusseldorf-Shanghai route, which only launched in May, saying it was performing well below expectations.

Air Berlin now operates 13 Airbus A330s on long-haul routes but says some of these may be shifted to medium-haul routes, which could be more favourable given the current price of fuel. Last year the carrier placed an order for 25 787s for delivery from 2013 to support plans to expand its new long-haul operation but Hunold says these plans are now being reviewed: "Currently everything is being reviewed but there are no concrete actions. In this current environment, I would say an expansion plan is not on our sight."

Hunold adds Air Berlin is now in a cost focussing rather than expansion mode. The carrier has expanded rapidly over last two years, taking over short-haul budget carrier dba in 2006 and last year buying a 49% stake in Swiss long-haul leisure carrier Belair in addition to the 100% share in LTU. The acquisition of LTU has quickly given the Air Berlin group a 6.7% share of the Germany-Asia market and an 8% share of the Germany-North America/Caribbean market (see chart). This will grow to 7.1% and 12.4%, respectively, if proceeds with the purchase of Condor.

The buying spree drove a 75% jump in the group's first quarter revenues from €373 million to €655 million. But head count has nearly doubled, from 4,372 to 8,488, and the carrier's operating expenses increased from €437 million to €727 million. The group currently operates a fleet of 125 aircraft, including 56 Boeing, 45 Airbus and eight Fokker narrowbodies.

Air Berlin's acquisition spree over the last two years has resulted in a major shake-up of the German market as the carrier has started competing more directly with Lufthansa. Partially in response to growth at Air Berlin, Lufthansa and the third leading player in the German market, TUI Group, revealed plans in January to merge Lufthansa low-cost unit Germanwings and TUI low-cost unit TUIfly. Lufthansa chief executive Wolfgang Mayrhuber said in late May there is no timeline on the proposed deal with TUI, which could also include the narrowbody element of TUI's charter operations, but something needs to change in Germany's highly competitive low-cost market.

"I am personally not happy with the performance of germanwings because it is much more hit by fuel prices and prices elasticity," Mayruhuber says. "But we do have the opportunity to either strategise with someone else and build a stronghold or just reduce growth in the current circumstance."

Source: Airline Business