Etihad Will Pay $94.9 Million to Increase Its Stake in Air Berlin to 29.2%

Etihad Airways agreed to provide Air Berlin Plc with $350 million in equity financing and funds for planes, helping the German carrier to ride out the slowdown and boosting the Gulf company’s challenge to Deutsche Lufthansa AG. (LHA)

Abu Dhabi-based Etihad will lift its Air Berlin stake from 2.99 percent to 29.2 percent by buying 31.6 million new shares for 72.9 million euros ($95 million) while providing five-year financing facilities of as much as $255 million for new jets.

The plan features a code-sharing deal that will help Etihad win traffic in Air Berlin’s key markets of Germany, Austria, Switzerland and Spain, Chief Executive Officer James Hogan said in an interview, heightening competition with Lufthansa, Air France-KLM (AF) Group and British Airways parent IAG. The German company, unprofitable since 2007, gets more time to restructure.

“Lufthansa won’t be happy,” said Joe Gill, an analyst at Bloxham Stockbrokers in Dublin. “The big three are concerned about what Middle Eastern carriers are going do next and this is a very tangible move. For Air Berlin, this on its own won’t sort things out, but it provides a major plank in providing options.”

Shares Jump

Air Berlin, Europe’s third-largest discount airline after Ryanair Holdings Plc (RYA) and EasyJet Plc (EZJ), rose as much as 28 cents, or 12 percent, to 2.59 euros and was trading 8.2 percent higher at 2.50 euros as of 12:54 p.m. in Frankfurt, paring the stock’s decline this year to 32 percent. Cologne-based Lufthansa was priced up 1.9 percent at 9.10 euros.

Etihad, which is closely held, bought the new shares at Dec. 16’s close of 2.31 euros, agreeing to keep them for two years and not increase its stake in that time. As a non-European airline Etihad can’t take a controlling position and Hogan said the deal is a “one-off,” with no interest in adding more stock.

According to the arrangement, Air Berlin will shift Middle Eastern flights from Dubai to Abu Dhabi, Etihad’s hub, attaching its code to 24 of the Gulf company’s 82 destinations to provide feeder traffic on routes to Asia and Australia. It will also drop a route to Bangkok and offer tickets only through its ally.

Etihad, the third-largest Middle Eastern carrier after Emirates and Qatar Airlines Ltd., will codeshare to 36 of Air Berlin’s 171 destinations. The airlines estimate next year’s revenue boost at as much 45 million euros apiece.

Problem Solved

Hogan, who will join a 17-person Air Berlin board as vice chairman, along with Etihad Chief Financial Officer James Rigney, said joint distribution and maintenance will also produce unspecified savings.

The two airlines, which plan to close the agreement in the first quarter, will also seek antitrust immunity to coordinate networks, sales and marketing, according to a statement.

“Air Berlin was having problems financing its fleet and by doing this deal we solve that,” Hogan said by telephone. “We get considerable access to their distribution and that means we can strengthen the seat factor and the quality of yield and our operations out of Germany and into Germany.”

Bloxham’s Gill said that today’s announcement marks a major change for Etihad and the Gulf carriers, which have hitherto operated as single-brand businesses and built inter-continental transfer hubs through large aircraft orders with Airbus SAS and Boeing Co. (BA), rather than via alliances and investments.

‘Alarm Bells’

“This is a material shift in terms of branding and getting deeply involved with a European carrier, so it should be ringing alarm bells for Lufthansa and, if they do this anywhere else, IAG and Air France-KLM,” he said.

Air Berlin interim CEO Hartmut Mehdorn said top shareholder Esas Holding AS, parent of Turkish discount operator Pegasus Airlines, backs the agreement, which dilutes existing holdings.

As of Sept. 30 Esas held a 16.5 percent stake following an investment in 2009. Hans-Joachim Knieps, one of Air Berlin’s original backers, held 7.5 percent, and Tui Travel Plc owned 6.9 percent gleaned through a transfer of some of its flights.

Mehdorn, who took over after Joachim Hunold quit in August, has been seeking partners to shore up the Berlin-based company’s finances after third-quarter operating profit fell 44 percent.

The discount carrier is grounding planes as it slashes routes and reduces frequencies to cut capacity by more than one million seats in order to save 250 million euros and pare debt by 50 million euros. It also plans to postpone the purchase of 19 jets in 2012 and 2013, shaving $508 million from investments, and to close bases in Erfurt and Dortmund next winter.

Etihad and Air Berlin together carry more than 40 million passengers a year and serve 239 destinations, with sales totaling $9 billion. The German company will go ahead with plans to join the Oneworld group of airlines next year, according to today’s statement, even though the alliance includes BA owner International Consolidated Airlines Group SA. Oneworld has its offices in New York and couldn’t be reached for comment.

To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net; Tamara Walid in Dubai at twalid@bloomberg.net

To contact the editor responsible for this story: Chad Thomas in Berlin at cthomas16@bloomberg.net

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