Munich-based DBA, formely Deutsche BA, faces the possibility of closure unless there are clear signs of a turnaround within a year, following its sale to Intro, the German investment company.

This was the clear message from Michael Oaten, joint managing director of Barons Financial Services, which advised Intro on the sale. Intro is backed by German textile entrepreneur Hans Rudolf Woehrl, who also founded NFD, a German regional airline, which in the early 1990s was merged with RFG to create a new carrier in Eurowings. Woehrl was a DBA board member from 1994 until 2001.

British Airways sold loss-making DBA to Nuremburg-based Intro following easyJet's decision not to take up an option to buy the carrier. Oaten warns that "people are not going to be throwing good money after bad" and that if there are not "clear signs" of a return to profitability after a year, then the airline could be shut down.

The carrier is looking to make cost savings of 20%, and to increase revenues by "at least" that figure, says Oaten. Alexander Kaiser, airline analyst at Frankfurt-based Cell-Consulting, says that these figures are "too ambitious". On the revenue side, he points to the high number of new entrants and tough market conditions.

On the cost side, Woehrl has told employees that they must accept a 20% pay cut for the coming year, or else 250 of the airline's 800-strong workforce will be made redundant. Kaiser warns, however, that this latter measure may not be enough, providing a cost saving of around 8%, still 12% short of the target. He adds that there are few other opportunities to reduce costs, given the carrier's stated intention of serving mainline airports.

Oaten believes that now the carrier is no longer associated with BA, it may face less pressure from rival carriers. Lufthansa is DBA's main competitor at Munich.

EasyJet had worked closely with DBA over the last year, but decided not to take up its option due to a failure to reach agreement on new working practices with pilot unions and the poor state of the German economy. As easyJet attempted to mould DBA into its business model, the low-cost carrier had pulled out of freight services, and Oaten says that the carrier will re-enter this market in order to boost revenues.

He adds that the carrier will be positioned in the mid-market area, possibly slightly above where easyJet envisaged, and, like easyJet, will be a mixture of business and leisure. Kaiser says that to be successful, DBA will have to focus primarily on the business segment, warning that if they try to continue the strategy seen in 2002 of competing with low-cost carriers "they will drown", as they have neither the cost base nor the pricing structure for this market.

He says that DBA's strong domestic presence is attractive to the business passenger, but that the absence of a frequent flyer programme is not.

Some of the southern European destinations that were being examined under easyJet's guidance, such as Madrid, Barcelona and Rome, are still under consideration as DBA seeks to increase utilisation levels in off-peak periods.

The carrier's chances of future survival have been greatly aided by the exit package made available by BA. The latter is selling the carrier for a token €1 ($1.2), but is providing £25 million ($42 million) of capital and underwriting the leases on DBA's 16 aircraft over the next year, at a total cost of £24 million. In exchange, BA will receive 25% of DBA profits, or 25% of a profit on disposal, through to June 2006.

Roger Maynard, BA's director of investments and joint ventures, comments: "The deal is a sensible one in the current climate. It ends our exposure to German losses, yet gives us the benefit of a share in any profits that the company makes in the next three years."

Oaten points out with the leases on DBA's 16-strong Boeing 737 fleet coming up for renewal over the next year, it may be in for a cash bonus if it can renegotiate better deals, since the BA sum is a fixed amount.


Source: Airline Business