Air Berlin Offers Growth Through Co-operative Ventures

With its stake in the Austrian airline “NIKI” and its co-operation with “Germania”, Air Berlin is now concentrating its forces against the low-cost carriers from the UK that are pushing their way into the German market. The company is relying primarily on the expansion of its City Shuttle operations.

Although with 9.6 million passengers Air Berlin became the second largest German airline after Lufthansa and achieved a 28 per cent increase in turnover at 894 million euros, the company’s managing director, Joachim Hunold, described 2003 as a “very difficult year for airlines”. On Friday at the annual press conference held at the ITB tourism trade fair in Berlin, he said: “Holiday flights were particularly affected by the war in Iraq and the uncertain economic situation in Germany. Although the bottom line was that we did not write red figures with regard to tour operators, the volume was still far below the level originally planned. If we had not gone into the low-fare business with our City Shuttle, we would have had quite a few grey hairs by now.”

Start-up costs fully recovered

The airline was able to generate its growth last year just from starting up budget flights from eight German airports to major cities such as London, Milan, Rome, Barcelona, Vienna and Zurich as well as from operating new domestic flights within Spain from its Majorca hub. The only comment Hunold made about the result, something the company traditionally keeps to itself, was: “Below the line we were slightly in the red in 2003. In view of the adverse conditions, though, we can still be proud of that achievement. Not only did we have to cope with the setbacks encountered by tour operators, we also managed to recover the full start-up costs for our City Shuttle.” However, Hunold is anticipating another “handsome profit” in 2004. That is already evident from the bookings received in the first two months.

In the current year Air Berlin is planning to carry 11.6 million passengers (a rise of 20.84 per cent) and to increase its turnover by 13 per cent to more than 1 billion euros. Although the number of available aircraft seats will only be growing from 7,586 to 7,835 this summer, the more frequent turnaround on the City Shuttle routes, all of them short-haul flights, will generate a noticeable increase in the available capacities. Air Berlin used to operate 39 of its own Boeing 737s types 400, 700 and 800, as well as two B 737-700s leased from “Hamburg International” and three BAe 146s from WDL. These contracts are coming to an end as the summer schedule for 2004 comes into effect. Air Berlin will be using 42 of its own Boeings and three Fokker F 100s leased complete with cockpit crews from the Berlin-based airline “Germania”, and will consequently have 45 aircraft at its disposal.

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Hidden reserves created

Half of the fleet is owned by Air Berlin, while the other planes are leased. Since the company writes off the bought passenger jets relatively quickly, i.e. within eleven years, considerable hidden reserves are constantly being created. This is because an aircraft that is twelve years old is generally still worth more than half its acquisition cost. Hunold stated that Air Berlin will take a decision this summer concerning the purchase of 70 new planes. It still remains to be decided whether the order would be placed with Airbus or Boeing. That will apparently depend on the terms that are offered by the manufacturers. Air Berlin should be taking delivery of the planes between 2005 and 2010. Nor has it been decided how many of these aircraft will be replacing the existing fleet or used to provide further growth for the company. “We need to wait and see what the market trends are this year,” said Hunold.

The operator feels that co-operation with other low-fare carriers currently offers the greatest opportunities for growth. At the start of the year Air Berlin took a 24 per cent stake in “NIKI”, the new airline owned by the Austrian Niki Lauda, three times Formula One world champion. At the same time Air Berlin acted as service provider and took over the marketing, sales and logistics operations for “NIKI”. This means that Niki Lauda provides the aircraft and crew, while Air Berlin looks after everything else. “NIKI” will be keeping its own airport bases only in Austria. The purpose of the alliance is to open up the eastern European market. This could allow Vienna airport, where Air Berlin is already the third largest carrier, to become a hub for both companies. This summer a “NIKI” Airbus will already be flying six times a week from Vienna to the Air Berlin hub of Palma de Mallorca, where there are fast connections to the Spanish mainland. “NIKI” currently has four planes at its disposal, and that number is set to grow to ten by next year.

Common cause against foreign budget airlines

Air Berlin recently concluded another co-operation agreement with “Germania” and its subsidiary “Germania Express”. Air Berlin will be taking over three 100-seater Fokker F 100s for its City Shuttle network, including the new routes from Berlin, Hamburg, Düsseldorf and Munich to Budapest, which will operate from 1st May, the day of the EU’s eastward expansion. “Germania Express” will be discontinuing its routes to Vienna and Zurich, and these will be taken over by Air Berlin. At the same time “Germania” has thinned out its Majorca flights. Agreements on other routes are currently under discussion. Hunold commented: “By working together we hope to fend off the new competitors from England and Ireland in the budget flights market, rather than wearing each other out in our own battles.”

Both Air Berlin co-operations have met with great interest from the industry. The company has already received enquiries from several European airlines, which are also interested in working with Air Berlin.

Hunold left no one in doubt that he would do his utmost to put up a massive fight against the new competition from the British Isles - particularly with regard to the Majorca routes, which form the core of Air Berlin’s operations. On these routes, that are also served by “Easyjet”, Air Berlin will be contending for the market with cut-price flights at 29 euros. And from 1st April Air Berlin will be operating a daily flight from London Stansted to Palma de Mallorca at £ 19 one way. Hunold explained: “Any competitor will have a difficult time taking us on, especially as regards the Majorca routes. After all, we operate 200 flights a week from Germany to the island. From there half our passengers take one of our connecting flights to the Spanish mainland. No one else can offer a similar network for Spain. Furthermore, in contrast to most of our rivals, we also offer a full onboard service, free of charge. That is why customers generally prefer to fly with us even if our tickets are a few euros more expensive. We have made a name for ourselves, and that name stands for quality.”

Another 32 per cent growth in Majorca

Joachim Hunold cited Air Berlin’s success in Palma de Mallorca in evidence of this theory. The Berlin-based company managed to increase its throughput in Europe’s major holiday airport last year by 50 per cent to 2,866,386 passengers and is the absolute market leader there by a wide margin. Most other airlines suffered a downturn in business. And in the first two months of this year Air Berlin was able to grow by a further 32 per cent in Palma. Already one third of passengers on the domestic Spanish routes are Spanish nationals. In terms of the whole of Spain, Air Berlin is already the largest foreign airline.

In its plans for further growth, Air Berlin is relying principally on selling ticket-only flights. Last year those sales accounted for 50 per cent, and by the end of February 2004 the figure had already risen to 53.1 per cent. By the end of the year ticket-only sales will reach the 60 per cent mark. Among tour operators Alltours currently accounts for 12.4 per cent, ITS for 9.4 per cent, Thomas Cook for 9.3 per cent and TUI for 5.4 per cent of turnover.

The planned increase in ticket-only sales will be achieved primarily through expansions of the City Shuttle network. With 4.5 million passengers in 2003, Air Berlin was the largest German airline in the low-fare segment, and the third largest in Europe. 52 per cent of tickets only are sold online (airberlin.com), 38 per cent via travel agents and ten per cent via the company’s own Service Centre.

No decision yet to float the company

At the press conference Joachim Hunold said about media announcements of Air Berlin’s intention to go public: “We are looking into it, but nothing has been decided as yet. A new injection of money would give us the opportunity to develop new markets, which would be quite a possibility in view of our good cost structure. In the past we have only ever been able to finance our growth with the money we had earned ourselves. On the other hand, transforming the business into a public limited company would mean giving up part of our independence and having to live from one quarterly report to the next. That requires careful consideration. In any case, our shareholders are not planning to sell out. They want to remain majority shareholders in the company.”
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