Historical Events and Structure of the Deal

The valuation of Lufthansa is – in parts – driven by the company’s acquisition of assets from insolvent airline airberlin Group and the resulting changes in the competitive landscape.

Therefore, in this second part, the focus will be on the insolvency of airberlin, the acquisition by Lufthansa, how it got approved by the EU regulators, its effect on the industry and the development of Lufthansa’s share price during the same period. However, firstly an overview about the historical events and structure of the deal is given.

The roots of airberlin trace back to 1978, when Airberlin Inc was founded in the United States as a charter airline, flying mostly to the Mediterranean, the Canary Islands, and North Africa for German tour operators. At that time, the Four Power Agreement, which followed World War II, allowed only aircrafts by the Allied Powers to operate in Berlin. Therefore, Airberlin GmbH & Co Luftverkehrs KG (airberlin) was established right after the end of the Four Power Agreement. The airline, which in the following years became known for its flights between Germany and Mallorca, grew to become Germany’s second largest airline by 2003. Airberlin further strengthened this position with the acquisitions of NIKI Airlines, Deutschen BA (dba), LTU, and LG Walter (airberlin, n.d.). Furthermore, it started a co-operation with Etihad Airways in 2011, and Etihad in the following years became the largest shareholder in airberlin (29.21% of total shares as of June 2017 (airberlin, n.d.)). However, airberlin’s net results have been negative since 2008, with the largest net loss of EUR -782 million occurring in 2016 (Annual Reports airberlin), and a net loss of EUR -434 million in the first quarter of 2017 (airberlin Q1 2017 Report, 2017).

10.1.1 Reasons for airberlin Insolvency

Several reasons can be found which led to those losses and the resulting insolvency of airberlin in 2017. First of all, in general it is difficult for airlines to survive in this highly competitive market. Net income is always a function of revenue minus costs. Most of the airlines’ costs cannot be influenced, as all airlines rely on planes from the same distributors (Airbus and Boeing), they all need to buy the same fuel, which is influenced by the oil price, and all of them have to pay the same charges to the airports for their departure and landing slots (Stelter, 2017).

Furthermore, revenues and profits rely on high passenger load factors, number of seats per plane (which is influenced by the space per seat), and flight hours per day. Whenever an airplane is

flying with empty seats, it is not making money on those seats. Low cost carriers are optimizing all of those three dimensions, as they lower the comfort on the airplane, conduct aggressive marketing for their tickets, and maximize flight times.

Several airberlin specific problems finally led to the insolvency of the company. These can be categorized in external and internal factors.

10.1.1.1 External Factors

Firstly, airberlin planned on operating many flights from the newly build airport Berlin Brandenburg Willy Brandt (BER), which should have opened in June 2012. However, due to technical issues in the building process, the opening got delayed by several years and is now expected to happen in October 2020. As airlines plan their route network usually one year ahead of schedule, airberlin planned to use BER airport as a hub-airport and sold tickets from there already. When the opening of the airport got delayed, airberlin had to further operate from airport Berlin Tegel, which cannot be optimally used as a hub-airport (airliners, 2017).

A second problem was also caused at airport Berlin Tegel. When the airline changed its ground operator Wisag to Aeroground in March 2017, this led to significant delays in the luggage handling and losses of passengers’ luggage. Not only did this cause passenger dissatisfaction with airberlin services, but it also led to delayed departures from the airports and cancellation of flights (see Figure 25), resulting in high compensation costs for the airline.

Figure 25 - Performance of airberlin Departures in July 2017 from Airport Berlin Tegel, Based on (airliners, 2017) 0

20 40 60 80 100 120 140

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Cancelled

Delayed (more than 15 min) On time

Another external factor is high taxes, e.g. the air traffic tax (Luftverkehrsteuer, between EUR 8 – 45 per passenger (Flugsteuer, 2011)), which airlines have to pay when departing from German airports. This lowered airberlin’s competitive position in comparison to foreign airlines, which have less flights departing from German airports and no or lower charges in their respective home markets (airliners, 2017).

10.1.1.2 Internal Factors

For a long time, airberlin was known for being a “tourist airline”. However, this business model is very seasonal, wherefore airberlin decided to operate a “City-Shuttle” from 2002 on and started competing with Low Cost Carriers like Ryanair and easyJet. Furthermore, airberlin acquired dba in 2006, which operated mainly on routes within Germany, as well as intercontinental airline LTU in 2007. This led to several problems. Not only was the integration of two large airlines and all its employees very difficult, but also did airberlin more than triple its size during these two years and broadened its portfolio by offering flights for business people as well as intercontinental flights for the first time. The increased complexity in business operations did not match airberlin’s management style at this time, where CEO Joachim Hunold himself wanted to be involved in every decision (airliners, 2017). The fast expansion together with a wrong management style and no clear strategic vision were the first mistakes that airberlin made..

Another problem for airberlin was their fleet of aircrafts. To lower Capital Expenses, airberlin decided to lease their planes, instead of buying them. However, the leasing conditions, especially a 20-year contract with TUIfly GmbH, were economically disadvantageous for airberlin and significantly contributed to their losses over the years (Hegmann, 2017).

Furthermore, airberlin had high costs arising from their booking systems. Instead of using one single, integrated system like most other airlines, airberlin operated several booking systems, which cost the airline several hundred million Euros each year (airliners, 2017).

After Joachim Hunold left airberlin in 2011, Etihad Airways became the largest shareholder of the airline. Airberlin, which at this time had already reported negative results for three years in a row, was dependent on Etihad’s capital injections. However, the conditions for the capital injections were quite restrictive, as Etihad prohibited airberlin to operate in the (attractive) Asian market and made airberlin to take routes to Abu Dhabi into their network. In April 2017, Etihad gave another credit line of EUR 350 million to airberlin, which at that time needed

approximately EUR 3 million per day to finance their operating business. However in August 2017, even though EUR 100 million of the line were not used yet, Etihad did not allow the transfer of another EUR 50 million to airberlin. As airberlin could no longer finance its operations after Etihad had withdrawn its financial support, they had to file for insolvency on August 15th, 2017 (Flöther, 2018).

10.1.2 Historical Events of airberlin’s Insolvency

After Etihad on August 9th, 2017 decided not to transfer any more money anymore to airberlin, they said they would offer another bridge loan, however, only under changed conditions, one of them being that other interest groups like politicians and Lufthansa also offer their help.

Lufthansa thereafter made some small adjustments to their leasing agreement they previously signed with airberlin, but Etihad still denied further payments based on this offer on August 11th, 2017, which means that a going concern assumption for airberlin was not given anymore.

Over the weekend, airberlin managers together with Freshfield lawyers and German politicians like Alexander Dobrindt (CSU) and Matthias Machnig discussed the insolvency process and how to keep airberlin running for another few months (Flöther, 2018). In the end, German Development Bank KfW (Kreditanstalt für Wiederaufbau, government-owned) gave a credit of EUR 150 million to airberlin, on which it has to pay 9% interest and give all their assets that are still available as securities. German chancellor Angela Merkel supported this deal, and said that with a very high probability, the German tax payer will not have to pay for it (Spiegel Online, 2017). Also the second largest political party in Germany, SPD, agreed with the decision, which was made during the summer vacation season. The KfW credit ensured that all travelers could return to Germany after their vacation and it also gave airberlin some time to negotiate with Lufthansa and other airlines in order to preserve all of airberlin’s 8.500 jobs (Schneider & Kahrs, 2017). However, this is not considered common practice in Germany, and the credit from the German government to airberlin was therefore criticized by other airlines, politicians, as well as the general public.

Airberlin filed for insolvency on August 15th, 2017, but continued its operations until October 28th, 2017. In the meantime, the bidding process for parts of airberlin started. Until September 15th, 2017, 79 parties, including Lufthansa but also other airlines, PE-funds etc., showed their interest to the insolvency trustee Flöther-Wissing. Finally, 15 investors handed in their bids, of which four did not fulfill the requirements. On November 1st, 2017, the district court of Charlottenburg opened the insolvency proceedings for airberlin (Flöther, 2017).

10.1.3 Acquisition of airberlin Assets

Table 59 shows an overview of targets and acquirers of airberlin parts and subsidiaries:

Acquirer Target / acquired position

Source Zeitfracht Group Leisure Group

(Subsidiary)

(Flöther, 2017): ”Zeitfracht

übernimmt airberlin Tochter Leisure Cargo”

Lauda Motion NIKI Luftfahrt GmbH (Flöther, 2018): ”NIKI:

Geschäftsbetrieb an Lauda Motion übergeben”

Lufthansa LG Walter

(FAZ, 2017): ” FAZ: Brüssel erlaubt Übernahme von LG Walter durch Lufthansa”

easyJet

25 aircrafts and landing slots at Berlin Tegel airport

(Sembhy, 2017): ”easyJet confirms acquisition of Airberlin assets”

Several bidders (through auctions)

Airberlin trademarks and IP addresses

(Flöther, 2018): “Verkaufsprozess für Marken hat begonnen”

Several bidders (through

auctions) Airberlin merchandise

and other small assets (Flöther, 2018): ”Airberlin - hohe Beteiligung bei weiteren Auktionen”

Table 59 – Overview: Acquirers of Certain airberlin Assets