Air Berlin files for insolvency after Etihad withdraws support

Air Berlin has filed for insolvency proceedings after main shareholder Etihad Airways withdrew its financial support.

The Oneworld member submitted the filing in a local Berlin court, though it won’t seek bankruptcy protection for its Niki and Leisure Cargo units, Air Berlin said in a statement.

Talks with Lufthansa and other parties regarding disposals are continuing, it said.

Air Berlin has been restructuring in an effort to stem years of losses, including leasing part of its fleet to Lufthansa. Plans to merge Niki with TUI AG’s German airline arm fell apart in June after Abu Dhabi-based Etihad said it failed to reach a deal on forming a joint venture for the operation.

The airline will continue flying with the help of a government loan likely to last it until mid-November. Lufthansa said it may buy parts of its biggest national rival.

Air Berlin has racked up more than €2.7 billion (US$3.2 billion) of losses in a little over six years and has net debt of €1.2 billion.

Etihad bought a 29 percent stake in 2012 as part of a plan to feed more passengers through its Abu Dhabi hub by building a network of minority investments, a strategy that it is now unraveling after itself suffering losses of US$1.87 billion in 2016.

In a statement issued to the media, Etihad Airways described Air Berlin's decision as "extremely disappointing for all parties, especially as Etihad has provided extensive support to airberlin for its previous liquidity challenges and restructuring efforts over the past six years."

“In April this year, Etihad provided €250 million of additional funding to airberlin as well as supporting the airline to explore strategic options for the business."

"However, airberlin’s business has deteriorated at an unprecedented pace, preventing it from overcoming its significant challenges and from implementing alternative strategic solutions," the airline said.

"Under these circumstances, as a minority shareholder, Etihad cannot offer funding that would further increase our financial exposure. We remain open to helping find a commercially viable solution for all parties."

In May this year Etihad-backed Alitalia also began bankruptcy proceedings after the Gulf airline, which owns 49 percent of the carrier, said it wouldn't extend additional funding.

Lufthansa waiting in the wings

Lufthansa and another unidentified airline are “far advanced” with plans for a partial rescue and a deal could be finalized in coming weeks, Air Berlin and Germany’s economic ministry said in separate statements. The government is supporting the process by providing a €150 million bridging loan through its Kreditanstalt fuer Wiederaufbau development bank.

Lufthansa is keen on acquiring Air Berlin assets including still-solvent Austrian leisure arm Niki, while EasyJet Plc has expressed an interest in other parts of the business, including German short-haul operations, people familiar with the talks said.

Some of Air Berlin’s operations may not find any takers and could be shut, the people said, adding that talks are evolving and no final decisions have been reached. EasyJet declined to comment.

Air Berlin already has links to Lufthansa, once its arch-rival, following an agreement to lease out part of its 144-strong aircraft fleet to Europe’s third-biggest airline group.

Ryanair said the situation is being “set up” for a takeover by Lufthansa which would breach antitrust rules while pushing up fares for consumers. The Irish carrier said it has lodged complaints with Germany’s Federal Cartel Office and the European Commission.

A mountain of debt with minimal assetts

Air Berlin has “almost no tangible assets” on its balance sheet, with all of its planes now leased rather than owned, Tony Lebon, a credit analyst at Oddo BHF in Paris, said by phone. “There might still be some value in the slots.” That suggests a “very low” recovery rate for its bonds, he said.

The airline began operations from West Berlin in 1978 with one leased Boeing 707. Because only Allied aircraft were allowed there at the time it was founded in Oregon by Kim Lundgren, a U.S. pilot who had previously flown for Pan American World Airways.

Following German reunification in 1990 Air Berlin embraced the low-cost model being developed by Ryanair and EasyJet. While the company went public in 2006 it was unable to keep pace with the discount specialists and struggled to win market share from Lufthansa in Germany.

It responded by adding long-haul flights via the takeover of unprofitable LTU and adopting a hybrid business model pitched somewhere between full-service and low-cost operations.

In the short term, tour operators TUI and Condor, the German arm of  Thomas Cook Group, should benefit from Air Berlin’s insolvency, as should Lufthansa’s Eurowings discount division, according to  Daniel Roeska, an analyst at Sanford C. Bernstein & Co.

“It is very unlikely that any third-party holiday company would be willing to use Air Berlin for packages leaving this winter or next summer,” Roeska wrote in a note. “Similarly, while it is in bankruptcy proceedings, no passengers will likely book on a seat-only basis.”