Flight International — 22 August — 4 September 2017

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STRATEGY GRAHAM DUNN LONDON

Air Berlin’s fall adds to Etihad troubles

Insolvency of Germany’s second largest carrier comes after Gulf backer and part owner withdraws financial support

J

ames Hogan, Etihad Airways’
chief executive during its era
of investments, declared in 2012:
“We believe it is a smarter way of
growth than buying another 100
aircraft. This isn’t the old Swis-
sair model of acquiring brands.
This is about how do we use this
scale to improve the bottom line;
to use our investments to get the
best possible costs.”
They are words that have come
back to haunt Hogan, as Air Ber-
lin on 15 August followed stable-
mate Alitalia into a formal insol-
vency process.
While there is no evidence that
Etihad will mirror the fate of Swis-
sair/SAirGroup, which collapsed
in 2001 under the burden of accu-
mulated debts, the uncertainty
surrounding Air Berlin and Alita-
lia leaves Abu Dhabi’s investment
strategy in some disarray.
Etihad’s recent exit from Dar-
win Airline, following the July
sale of its 33% stake to Adria Air-
ways, leaves Air Serbia – of which
it holds a 49% share – as the Gulf
powerhouse’s only remaining Eu-
ropean equity partner without a
financial cloud hanging over it.

EUROPEAN HEADACHE
Unfortunately, it is not the small
investments which are causing Eti-
had headaches: the bankrolling of
Air Berlin and Alitalia, and both
carriers’ consequent financial trou-
bles, is what has proved a financial
drain on Abu Dhabi’s coffers.
Both airlines were cash-
strapped and loss-making before
Etihad arrived on the scene. But
despite significant investment
and product overhauls, both con-
tinued to haemorrhage cash.
Alitalia filed for extraordinary
administration earlier this year
when a proposed recapitalisa-
tion, including Etihad, collapsed
after unions rejected cost-saving
measures. Administrators have
since embarked on a sale process
to secure fresh investment.
Now, Air Berlin – which was
already undergoing a major re-

structuring that had sharply re-

duced its size – has filed for insol-

vency. It is currently being

propped up by a short-term €

million ($176 million) loan from

the German transport ministry.

The move came after it was no-

tified by Etihad “that it no longer

intends to provide Air Berlin

with financial support”, says the

German carrier. Etihad owns

29% of Air Berlin and had under-

written the carrier since becom-

ing a shareholder in 2011.

Etihad’s European investments

formed part of a wider strategy,

which has also involved acquir-

ing holdings in India’s Jet Air-

ways and Virgin Australia, aimed

at building its presence in key

markets and feeding traffic

through its Abu Dhabi hub.

But Etihad last year signalled its

growing concerns over Air Berlin

and Alitalia, flagging the need for

both to review their businesses.

In January, in announcing that

long-serving chief Hogan would

leave the carrier this summer, the

airline also acknowledged that its

investments were under scrutiny,

despite reaffirming its commit-

ment to the strategy.

Its subsequent willingness to

support Alitalia’s recapitalisation

supported the view that Etihad

was prepared to pull its financial

weight. Likewise, Etihad has

highlighted its provision in April

of €250 million in additional

funding to Air Berlin to enable

the German carrier to explore

strategic options.

But in both cases the challeng-

es have proved too much: in Air

Berlin’s case, Etihad says the

business has “deteriorated at an

unprecedented pace”, preventing

it from implementing alternative

strategic solutions.

CHALLENGES AHEAD

“Under these circumstances, as a

minority shareholder, Etihad can-

not offer funding that would fur-

ther increase our financial expo-

sure,” the Abu Dhabi carrier says,

adding that it “remains open to

helping find a commercially via-

ble solution for all parties”.

One of the challenges for Eti-

had has been that because of for-

eign-ownership rules, it holds

only minority stakes in these car-

riers. This has restricted its abili-

ty to fund any restructuring.

Likewise, the drag of these in-

vestments has created added pres-

sure in an already challenging

commercial landscape. Etihad in

July disclosed a net loss of

$1.87 billion in 2016, after a profit

of $103 million the previous year.

While there were several fac-

tors behind the scale of the loss,

the roughly $800 million charge

on “certain assets and financial

exposures to equity partners,

mainly related to Alitalia and Air

Berlin” is significant.

Etihad’s long-term intentions for

its stake in Air Berlin and Alitalia

remain unclear, further complicat-

ed by the lack of a permanent suc-

cessor to the now-departed Hogan.

It is, in any case, among the

companies reported to have

shown preliminary interest in the

sale process of Alitalia, for which

administrators have now set a

deadline of 15 September for sub-

missions of firm interest.

Likewise, Etihad has been de-

veloping a partnership with Luf-

thansa. This spawned a deal for

the German carrier to wet-lease 38

Airbus A320-family jets from Air

Berlin and lessors. Lufthansa, and

another undisclosed carrier, is in

advanced negotiations to take

over parts of the Air Berlin group,

although that deal faces opposi-

tion from Ryanair, which has com-

plained to Germany’s competition

regulator and the European Com-

mission over the move.

While from a financial per-

spective its holdings in Air Berlin

and Alitalia racked up heavy

losses, they have played a role in

supporting increased traffic flow

through Abu Dhabi. Etihad pas-

senger numbers reached 18.

million in 2016, of which it at-

tributes about 30% to airline and

codeshare partnerships.

Etihad’s mandate to develop

the Abu Dhabi hub means that the

rationale for its equity investment

has always been wider than just

the performance of an airline asset

itself. But limited by what a mi-

nority stakeholder can achieve,

and amid intense competition and

significant challenges, the extent

to which Etihad will remain fi-

nancially involved is uncertain. ■

Airline has consistently lost money despite funding from Abu Dhabi

AirTeamImages

“Etihad cannot offer

funding that would

further increase our

financial exposure”

Etihad Airways