Photographer: Jasper Juinen/Bloomberg

Air Berlin Files for Insolvency as Etihad Pulls Funding Plug

  • German carrier will continue flying with help of state loans
  • Lufthansa in talks to buy parts of its discount rival

Air Berlin Plc filed for insolvency after leading shareholder Etihad Airways PJSC withdrew its financial support, marking the second failure of a major European airline in four months after the Persian Gulf carrier pulled the plug on funding Italy’s Alitalia SpA in May.

While Air Berlin, which has 8,600 staff, will continue flying with the help of a government loan likely to last it until mid-November, Tuesday’s filing puts German jobs at risk weeks before German Chancellor Angela Merkel stands for re-election. Deutsche Lufthansa AG said it may buy parts of its biggest national rival.

Air Berlin has racked up more than 2.7 billion euros ($3.2 billion) of losses in a little over six years and has net debt of 1.2 billion euros. Etihad bought a 29 percent stake in 2012 as part of a plan to feed more passengers through its Abu Dhabi hub by building a network of minority investments, a strategy that it is now unraveling after itself suffering losses of $1.87 billion in 2016.

“Etihad has notified Air Berlin of the fact that it will not provide any further financial support,” the Berlin-based carrier said in a statement, adding that the move has led it to conclude that there is “no longer a positive continuation prognosis.” Etihad’s two board representatives have resigned.

Air Berlin’s Magnificent Flying Cash Burn Machine: Gadfly

Air Berlin shares fell as much as 51 percent and closed 34 percent lower at 51 cents in Frankfurt, valuing the company at 59.6 million euros. Its 170 million euros of bonds due May 2019 fell 33 cents on the euro to a record low of 20 cents, according to data compiled by Bloomberg. Lufthansa rose 4.7 percent, the most in five months.

Etihad said that it withdrew funding after Air Berlin’s operations deteriorated at an “unprecedented pace” in recent months. The state-owned Mideast carrier’s links to Germany, which include a code-share agreement with Lufthansa, remain important and it is ready to assist in finding a “commercially viable” solution for Air Berlin, according to an emailed release.

Lufthansa and another unidentified airline are “far advanced” with plans for a partial rescue and a deal could be finalized in coming weeks, Air Berlin and Germany’s economic ministry said in separate statements. The government is supporting the process by providing a 150-million-euro bridging loan through its Kreditanstalt fuer Wiederaufbau development bank.

Lufthansa is keen on acquiring Air Berlin assets including still-solvent Austrian leisure arm Niki, while EasyJet Plc has expressed an interest in other parts of the business, including German short-haul operations, people familiar with the talks said. Some of Air Berlin’s operations may not find any takers and could be shut, the people said, adding that talks are evolving and no final decisions have been reached. EasyJet declined to comment.

Air Berlin already has links to Lufthansa, once its arch-rival, following an agreement to lease out part of its 144-strong aircraft fleet to Europe’s third-biggest airline group. Ryanair Holdings Plc said the situation is being “set up” for a takeover by Lufthansa which would breach antitrust rules while pushing up fares for consumers. The Irish carrier said it has lodged complaints with Germany’s Federal Cartel Office and the European Commission.

Air Berlin submitted the insolvency filing in a local Berlin court, though it said it won’t seek bankruptcy protection for Niki and the Leisure Cargo GmbH units. Plans to merge Niki with TUI AG’s German division fell apart in June when Etihad said no agreement had been reached.

After the filing Air Berlin creditors will have to forgo parts of their investment, German Economy Minister Brigitte Zypries said in Berlin, predicting that the carrier will also need to offload some landing rights in the city. The government loan should keep it flying for about three months, she added.

Air Berlin has “almost no tangible assets” on its balance sheet, with all of its planes now leased rather than owned, Tony Lebon, a credit analyst at Oddo BHF in Paris, said by phone. “There might still be some value in the slots.” That suggests a “very low” recovery rate for its bonds, he said.

The airline began operations from West Berlin in 1978 with one leased Boeing Co. 707. Because only Allied aircraft were allowed there at the time it was founded in Oregon by Kim Lundgren, a U.S. pilot who had previously flown for Pan American World Airways.

Following German reunification in 1990 Air Berlin embraced the low-cost model being developed by Ryanair and EasyJet. While the company went public in 2006 it was unable to keep pace with the discount specialists and struggled to win market share from Lufthansa in Germany. It responded by adding long-haul flights via the takeover of unprofitable LTU and adopting a hybrid business model pitched somewhere between full-service and low-cost operations.

In the short term, tour operators TUI and Condor, the German arm of Thomas Cook Group Plc, should benefit from Air Berlin’s insolvency, as should Lufthansa’s Eurowings discount division, according to Daniel Roeska, an analyst at Sanford C. Bernstein & Co.

“It is very unlikely that any third-party holiday company would be willing to use Air Berlin for packages leaving this winter or next summer,” Roeska wrote in a note. “Similarly, while it is in bankruptcy proceedings, no passengers will likely book on a seat-only basis.”

Rome-based Alitalia began bankruptcy proceedings for the second time in a decade on May 2 after workers rejected a 2 billion-euro refinancing plan involving 1,600 job losses. Etihad’s then-chief James Hogan said his company wouldn’t carry on in investing without the support of all stakeholders.

Hogan has since left Etihad, which last month also announced that it was exiting another so-called Equity Alliance partner with the sale of a stake in Swiss regional carrier Darwin to Slovenia’s Adria Airways.

— With assistance by Thomas Seal, Luca Casiraghi, Heather Burke, Birgit Jennen, and Eyk Henning

    Before it's here, it's on the Bloomberg Terminal.