Air Berlin Bankruptcy. Backgrounds and Reasons

Table of Contents

1. Introduction

2. Background information Air Berlin

3. IPO and first signs of financial issues

4. Further financial troubles and Bankruptcy

5. Reasons for the Bankruptcy

6. Why is the airline industry so troublesome

7. Conclusion

1. Introduction

The airline industry has seen many bankruptcies within the last couple of decades. This trend was even altered after the terror attacks on September 11, 2001. A trend that has not slowed down within recent years either. Especially, in Europe, one could see major global airlines file for bankruptcy within the very last years. Amongst them was the German airline 'Air Berlin' in 2017 as well as the Italian Airline Alitalia. The question that arises in this context would be how this tendency of financial ruin for companies within the airline sector appears. Therefore, the following paper tries to research this tendency with help of the recent bankruptcy of the German airline “AirBerlin”. Furthermore, it tries to examine the causes as well as to find possible solutions that could prevent future happenings like this.

2. Background information Air Berlin

First of all, the Air Berlin PLC & Co. Luftverkehrs KG i.I, with seat in Berlin and basis on the airport Berlin Tegel was a German airline. It was a wholly owned subsidiary of the listed Air Berlin PLC, whose largest single shareholder was the Emirati Etihad Airways. On 15 August 2017, Air Berlin requested the opening of insolvency proceedings, the self-economic operation was continued with the help of a federal guarantee until 27 of October 2017. Parts of the company, including the business at Tegel Airport and its subsidiary LGW, were sold to Lufthansa and easyJet. The last airline of Air Berlin, Belair, filed for bankruptcy in mid-August 2018. In order to work out the causes for this bankruptcy, I would like to give some more insight on the history of the company.

After the American pilot Kim Lundgren had lost his job at Pan Am in the wake of the oil price crisis, he founded Air Berlin Inc. in July 1978 as a charter airline under FAA approval in the US state of Oregon, to flights to and from West Berlin. Official seat of the Air Berlin USA was Miami, which was occasionally served from Berlin. The first flight of the company led on April 28, 1979 with a Boeing 707 from Berlin to Palma de Mallorca. In 1981, the two 707s were replaced by two smaller Boeing 737s. Air Berlin specialized in destinations around the Mediterranean, Palma was for a long time the most frequent destination of the company (Air Berlin PLC & Co. Luftverkehrs KG, SWOT Analysis, 2018)

After German unity, the air sovereignty of the Allies fell, so that a change of registration to the Luftfahrt-Bundesamt became necessary. On April 16, 1991, Joachim Hunold and Kim Lundgren founded the German Air Berlin GmbH Co. Luftverkehrs KG and took over Air Berlin Inc. In the following period, managing partner Joachim Hunold fundamentally changed the company profile.In 1998, Air Berlin offered for the first time ten percent of the seating capacity directly without a package arrangement of an organizer, at the same time launched a daily Mallorca shuttle from Berlin, Dusseldorf and Paderborn. With a fleet of ten aircraft they served nine German airports and from Luxembourg holiday destinations around the Mediterranean. Since 1999, Air Berlin has been a member of IATA. By 2001, the proportion of directly sold seats increased to one quarter. With 25 Boeing 737-800 aircraft, 14 German airports served holiday destinations. In response to the emergence of low-cost airlines Air Berlin began in September 2002, under the name "City Shuttle" to offer connections to major European cities with high tourist volumes.In 2004, Air Berlin acquired 24 percent of the shares in the Austrian airline Niki. The airline Germania, which at that time had 577 employees and a fleet of 44 aircraft, was to be tied to Air Berlin at the end of 2005 by a management contract;

3. IPO and first signs of financial issues

In the run-up to the IPO planned for 2006, Air Berlin changed its corporate form from a GmbH & Co. KG to a Limited & Co. KG in January, thereby transferring the GmbH into a public limited company under British law (PLC). In this case, the PLC, instead of a German legal person, became a foreign general partner of the German limited partnership. The reason for this change was for example balance sheet benefits and better write-off options, as well as the circumvention of corporate co-determination. The initial public offering of Air Berlin PLC was initially scheduled for May 5, 2006, but then postponed at short notice, as the original price range of 15 euros to 17.30 euros had been set too high. On May 10, 2006, the price was then announced at 12 euros per share, resulting in total proceeds of 510 million euros, about 360 million euros less than originally planned. The first listing took place on May 11, 2006. After the IPO, 38.41 percent were in free float, 16.36 percent in Deutsche Bank, 8.58 percent in Ringerike aviation participation, 8.40 percent in Hans-Joachim Knieps and other investors (Weiss, 2018).

On January 7, 2013, Air Berlin announced a change of CEO. Austrian Wolfgang Prock, former Chief Strategy and Planning Officer, replaced Hartmut Mehdorn as Chief Executive Officer. Also in January 2013 it became known that in the course of restructuring measures, which had been going on for some time now, about 900 jobs were to be cut and a salary waiver of five percent was planned for the remaining workforce. A few weeks later, it was announced that the hub at Nuremberg Airport, where so far many seasonal holiday flights were bundled, will not be continued in the winter timetable 2013/2014 and that in future it will concentrate on direct instead of connecting flights in tourist traffic. With the inclusion of the new and so far only connection between Berlin and Chicago starting from the 23. March 2013, Air Berlin used the hub of American Airlines for connections within the USA. In addition, the frequencies were again increased to New York, Los Angeles and Miami. At the same time, however, the seasonal non-stop flights to Las Vegas, San Francisco and Vancouver were canceled. In March 2013, the liquidation of the joint venture Air Berlin Turkey was announced, which was entered into at the end of 2011 with Pegasus Airlines.As of August 2013, after several sales, only ten aircraft were owned by Air Berlin, the rest of the fleet was operated by aircraft leasing or sale-lease-back, which is also common with other airlines. On April 28, 2014, after several delays, the company released its sales figures of the previous year and had to admit a record loss of 315.5 million euros, which was largely offset by the largest shareholder Etihad Airways in the form of a perpetual subordinated convertible over 300 million euros. CEO Wolfgang Prock-Schauer announced a "fundamental restructuring" (Prock-Schauer, 2014) but still gave no details. On 26 September 2014 it was announced that Air Berlin has canceled 18 out of 25 outstanding Boeing 737-800 and all 15 ordered 787-9. At the end of October 2014, it was announced that 200 more jobs would be saved in the course of 2015 without dismissals. On 3 November 2014, the resignation of CEO Wolfgang Prock was announced, his successor was on February 1, 2015, Stefan Pichler. In December 2015, the Administrative Court of Braunschweig initially prohibited some of the planned codeshare connections with Etihad, but a large part of the connections was re-authorized by the Lower Saxony Higher Administrative Court on January 14, 2016. Due to lower demand, the cessation of all flights to Russia in spring 2015 was announced in October 2015. In November 2015, Air Berlin announced that the hub Palma de Mallorca Airport will be set in the summer of 2016 and the operated from there routes to the Spanish and Portuguese mainland will be gradually phased out by then (Weiss, 2018).

Since July 2016, Air Berlin had no own aircraft. In order to reduce costs, all aircraft were leased instead. Leasing is common in the aviation industry, but not to own any airplanes is rather uncommon. Ongoing leasing rates weigh on cash flow, and aircraft can no longer serve as collateral. Air Berlin completed the harmonization of the fleet in the 2016 fiscal year by means of a complete conversion to the Airbus A320 family. Capacities were reduced by almost ten percent compared to the previous year. Air Berlin suffered from the fierce competition in air traffic and the delayed completion of Berlin Brandenburg Airport. On September 28, 2016, Air Berlin announced that it had already "profoundly restructured" the group, having previously reported on several occasions. The core of the restructuring was that the company should become a "specialized network carrier" concentrating on long-haul flights from Berlin and Düsseldorf with a core fleet reduced to 75 aircraft. According to the plans, the tourism business should be grouped with 35 or 60 airplanes in a separate business unit. In addition, a total of up to 40 aircraft were delivered to the Lufthansa subsidiaries Eurowings and Austrian (AirBerlin, 2016).

4. Further financial troubles and Bankruptcy

On 11th of August 2017, Etihad Air Berlin announced the urge of further financial support. On August 15, 2017, the airline and its general partner (Air Berlin PLC) each filed a petition for insolvency proceedings in self-administration with the creditor, Lucas Flöther, CEO Thomas Winkelmann and Plenipotentiary General Frank Kebekus. According to EuInsVO, the jurisdiction of the Charlottenburg district court was also established for the formal British PLC. The flight operations were initially continued, funded by a secured by federal guarantee transitional credit in the amount of 150 million euros, which was approved despite the complaint of its rival Ryanair by the EU antitrust authorities. On 25 August 2017, the company in which the frequent flyer program Topbonus is spun off and in which Etihad owns 70% of the shares, filed for bankruptcy. Following this started a bidding period, where airlines were able to overtake the whole or parts of the Airline. The bidding period ended on 15 September 2017. On 25 September 2017, one day after the general election, it was announced that Easyjet and Lufthansa were negotiating the takeover of most aircraft (D. Meyer, 2017).

On October 12, 2017, Lufthansa agreed to acquire the Air Berlin subsidiaries Niki and LGW and to operate 20 aircraft. The shares should cost 210 million euros. The negotiations with easyJet were continued. Shortly after the cessation of operations of Air Berlin, the British company announced that they had agreed for 40 million euros on the acquisition of 25 aircraft of the type A320 at the Berlin Tegel airport location. EasyJet wanted to conclude lease agreements for the machines (Jenkins A, 2017).

Up to 1000 pilots and flight attendants were to be recruited on the basis of collective bargaining agreements negotiated with the trade union. On November 1, 2017, the insolvency proceedings on the assets of the Air Berlin companies were opened. Shortly after the insolvency proceedings were opened, the insolvency administrator announced a looming mass inadequacy. On December 12, easyJet's proposed part of the acquisition was approved by the European Commission. Lufthansa, on the other hand, withdrew its offer for Niki because of the rejection of the Commission the following day. On January 16, 2018, the self-administration in the insolvency proceedings of the companies Air Berlin PLC & Co. Luftverkehrs KG, Air Berlin PLC and airberlin technik GmbH was repealed and the former administrator Lucas Flöther appointed as insolvency administrator. Air Berlin Aviation, founded in 2017, was acquired by the Thomas Cook Group from the bankruptcy estate and has since been operating under the name of Thomas Cook Aviation wet-lease flights for Condor (Clark, & Dunn, 2018).

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