End game for Air Berlin?

I’ve written a couple of times about the on-going insolvency process unfolding at oneworld carrier, Air Berlin, however today things seem to have gone from bad to worse.

However before I cover today’s events, let me take some time to re-cap and take a look at how they got into their current mess.

Air Berlin (and also Alitalia) have been losing money for many, many years.  Etihad, under it’s former CEO, James Hogan had a strategy of buying minority stakes in a variety of airlines around the world, investing in them, in an attempt to turn them around.  This became “Etihad Airways Partners” and was a partial attempt to build a fourth global alliance similar to Oneworld, Skyteam and Star Alliance.

There’s now very little of this initiative left however there’s still bits and pieces of the branding left in various places, and oblique references on the Etihad website.

What happened is that the airlines that Etihad bought into continued to lose money.  They weren’t able to restructure them sufficiently in order to turn them into profit making entities.  Further, it also distracted key staff from the main Etihad group to focus on these restructuring efforts, leading them to take their eye off the ball at the main airline, contributing to their poor financial results that I talked about earlier this year.

At the start of the year, Etihad’s patience ran out with propping up this rag-tag bunch of airlines and they turned off the funding and expertise.  They also fired their own CEO for good measure.

On the 15th August, Air Berlin filed for insolvency proceedings in a Berlin court.  However the German government stepped in with a €150m loan in order to ensure that the airline didn’t immediately shut down; there are federal elections on the 25th September, so the second largest airline in Germany stranding voters six weeks before polling day would not have looked good.

Since then, there has been a steady drip, drip, drip of worsening news.

On the 19th of August, TopBonus, the frequent flier programme which is a separate legal entity, also went into administration.  This company was actually 70% owned by Etihad, which they used as a route to gain further control over the main Air Berlin entity (the EU restricts foreign ownership of airlines to 49% maximum).

All earning and burning activities using TopBonus miles were suspended and at a stroke anyone with an existing balance was put in a very uncomfortable position.  TopBonus was essentially issuing miles to AirBerlin which were accounted for as a debt on their books.  When Air Berlin went into administration, this debt is “old” debt and thus TopBonus becomes an unsecured creditor, therefore leading to their own insolvency.  It’s a mess.

Air Berlin then started to cut routes.  Earlier this month they announced all long-haul flying from Berlin would end on the 1st October.

A couple of days ago, they announced their entire schedule to the Caribbean would end, from all of their German hubs.

Other oneworld airlines have now started to suspend the ability to earn and spend miles with Air Berlin, including British Airways, American Airlines, Qatar Airways and Qantas.

As we speak, negotiations are underway with a variety of potential investors to parcel up the airline’s assets.  Easyjet, Lufthansa and a variety of third parties are all negotiation with the administrators with best and final offers due this Friday 15th September.

Which leads us to today.  According to Spiegel (auf Deutsch), over 200 pilots today called in sick, leading to over 100 flight cancellations.  It appears that the senior pilots are unhappy with the way the negotiations are going fearing that whatever deal emerges won’t respect their seniority or existing terms and conditions.

From a commercial perspective this is entirely sensible – staff pay and conditions is one key element that has made Air Berlin uncompetitive to date, leading to its current crisis.  It would be foolish for anyone to want to carry these obligations over into a new entity.

So far this has been pretty sorry story and I don’t see it getting any better.  Up until today, I’d have been ok booking a flight on Air Berlin for travel within a week if there were no reasonably priced alternative.  However given the current wild-cat strikes, I have zero confidence that they are able reliably operate any schedule.  I’m sure that every staff member is looking for another job elsewhere which isn’t going to lead to great customer service either.

If you hold a ticket on Air Berlin issued by another airline such as an Avios booking with British Airways, then you should be ok.  If (when?) Air Berlin fails, they should be able to re-accomodate you.  This is what happened when Malev failed.  However if you have a ticket issued by Air Berlin then I would not be terribly optimistic.  All you can do is hang tight, but I would definitely be investigating alternative arrangements where possible.

We should know more next week when all the offers are into the administrators, but it’s not looking good.


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