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Sun 23 Sep 2012 09:19 AM

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Etihad's push to get airberlin back in the black

Airberlin CEO Hartmut Mehdorn is determined to use Gulf petrodollars to return the loss-making carrier to profit by the end of his tenure next year. But the delay in Berlin’s new airport has put a question mark over his ability to reach that target

Etihad's push to get airberlin back in the black

Germany is traditionally known the world over for its business-like efficiency, with chancellor Angela Merkel’s success in steering the country through the eurozone crisis regularly held up as a prime example.

For this reason, the ongoing delays and design issues that are plaguing one of the country’s latest infrastructure projects — the Berlin Brandenburg Willy Brandt Airport — has become a national embarrassment and a source of heated debate in the German capital.

As Hartmut Mehdorn, CEO of airberlin, Germany’s second-largest airline, bluntly puts it: “It is a big mess”.

For Mehdorn, the delay has become an even bigger burden as the loss-making carrier was planning to set up its new central hub at the new airport and use the investment it receives from Abu Dhabi’s Etihad Airways — which in December 2011 bought a 29 percent stake in the airline — to propel it back to profitability by the end of 2013.

The airport, which is being built at a cost of
€2.5bn ($3.2bn), has already been delayed twice and the opening has now been pushed back until late 2013.

The government-backed facility was set to replace Berlin’s three aging existing airports, and the delay has heaped further costs on airberlin. Earlier this year, the carrier reported that its losses for the first three months of 2012 had widened to
€66.2m ($81.8m), compared with a year-earlier loss of
€43.9m.

Jürgen Pieper, an analyst at private bank Metzler, estimates the delays could be costing airberlin around $6m a month. “Now the airline is losing customers daily at Tegel Airport and still has to finance the costs of already-installed facilities at the construction site of the new airport,” Pieper told Der Spiegel. If the airport is delayed until next autumn, Pieper believes a loss of
€60m ($78.5m) would be a conservative estimate.

As we sit down for a one-on-one at airberlin’s headquarters in the German capital, Mehdorn refuses to confirm the figures, but he says the carrier will pursue legal action if it is not adequately compensated for the ongoing losses it is incurring.

“We are in talks with the Berlin Brandenburg Airport. We think they have to reimburse… if they don’t do this we go to court.”

Mehdorn, who was previously chairman of Deutsche Airbus and recently CEO of Deutsche Bahn, Germany’s biggest railway company, is clearly prepared to do battle over this issue. It is likely to become yet another major domestic headache for Merkel, who is up for reelection in 2013.

He dismisses reports suggesting the delays are due to fire-safety tests and blames the government’s inadequacy for the pushing back of the official opening.

“It is not the fire regulations. It is a big mess… It is politicians trying to build an airport. They should let guys who know about airports to build big projects. There are 82 million Germans available and I bet you will find 20 who have enough experience in constructing such an airport. Politicians are short-term thinkers and they just think about re-election and nothing else,” he says.

Despite the carrier’s equity plummeting by about two thirds to
€101.3m ($132.6m) by the end of June, its stock price dropping by almost a quarter this year and its losses rising, Mehdorn says he is still confident he can return the carrier back into the black in time for the carrier’s 35th anniversary next year.

“We keep saying that this year is a transition year for airberlin. In the first half of this year, we have been in the red so I cannot call it a good year, of course. However, we are still saying that in 2013 we envisage to be back to being profitable. So yes, we plan to get back in the black by end of 2013.”

However, Saj Ahmad, chief analyst at StrategicAero Research, is more sceptical as to the claims that the carrier can be turned around in such a short time.

“Considering they haven’t had a profit since 2007, to suddenly become profitable in a matter of months is questionable — especially when they have pretty much consumed the whole amount of money infused by Etihad too,” Ahmad says.

“Breakeven is a possibility but I will look to the next two quarters as a better indicator. Q2 was a loss, and a significant one too.”

A former board member, Mehdorn was appointed as an interim CEO when the carrier’s former chief Joachim Hunold unexpectedly quit last year. One of the major decisions Mehdorn masterminded was the partnership with Abu Dhabi’s Etihad Airways, which acquired a 29 percent stake in December 2011.

“The presence of Etihad Airways helps us substantially. There is no doubt that Etihad is helping us overcome the crisis. Thanks to the Etihad partnership, we are able to operate much easily,” he says emphatically.

In fact, airberlin is set to save millions of dollars as a result of the partnership with the Abu Dhabi carrier. “When you take a twelve-month period, it has gone up to $150m savings in total due to joint purchases and other things,” says Paul Gregorowitsch, chief commercial officer at airberlin. “We have a lot of programmes that are helping us raise efficiency. They know some things which we can learn from and vice versa,” adds Mehdorn.

As part of Etihad’s acquisition, the Abu Dhabi carrier is reported to have agreed to grant airberlin up to $255m, of which
€90m ($117.8m) was allegedly drawn down in the first quarter.

While Mehdorn acknowledges that a loan had been agreed as part of the deal and the financing would be released in three tranches, he declines to confirm the overall figure or how much had so far been used.

He also believes that Etihad is unlikely to move to increase the size of its stake in airberlin. “I don’t think that is Etihad’s strategy — to be the major shareholder, which will create a couple of other questions because, as per the European law, 51 percent of the shares have to be with the European shareholder.

“As per my discussions with James Hogan [CEO of Etihad Airways], there is no intention to raise the current stake. Unless he tells me different, he is happy with the 30 percent stake.”

Ahmad believes that “for Etihad, the real benefits [of the airberlin stake] will be not just EU gateway access — but that it will really manifest in a greater revenue return when airberlin becomes profitable.

“Etihad is chasing inorganic traffic. That’s all very well, but in doing so, it has to be profitable otherwise what’s the point — they could have done that without airberlin. And with fuel costs rising and the spectre of war between Iran and Israel likely to further eke costs higher, it makes turning around airberlin even more important.”

If Etihad was to push for a larger stake it would have to sacrifice increased landing rights into the German capital, an issue which has been a major diplomatic sticking point between the UAE and German governments.

Executives from Etihad and Dubai’s Emirates Airline have long pushed for increased landing rights in German cities, particularly Berlin. A series of high-profile executives and diplomats on both sides have weighed into the argument, claiming the federal government reluctance was the result of protectionism towards Lufthansa, Europe’s largest airline, which is based out of Frankfurt.

“The difficulty is the federal government. They are very restrictive. They [the federal government] have had a very strong lobbying from Lufthansa,” the then-mayor of Berlin, Harald Wolf, told Arabian Business in 2011. Of course, Lutfhansa is facing its own problems at the moment, with crippling strikes and falling profits.

Over lunch in the German capital, Burkhard Kieker, CEO of VisitBerlin, the city’s tourism authority, points out that the number of Gulf tourists to Berlin has increased 50 percent in the first six months of 2012 since the Etihad link was announced, but he is equally embarrassed by the situation with landing rights and the delayed airport.

“[The federal government] is blocking it on behalf of Lufthansa,” he says, but offers some light at the end of the tunnel. “I think when the airport opens we will see some movement. We don’t care who flies, we want connections. Lufthansa tries to block it but they don’t fly themselves and that is a bad situation.

“[Etihad] is highly welcome in every respect, we are very happy that Abu Dhabi has covered airberlin. We are now in the Etihad Holidays catalogue and they use the network, to bring people to Berlin. For us it is a natural marketing partner and we are happy to see Etihad itself flying into Berlin.”

Another benefit of Etihad Airways’ link-up with airberlin is that it is a way around the landing rights issue, and Mehdorn says he is sure Lufthansa is not happy about the development.

“I am not knocking the door to ask them… I don’t want to say they are arrogant [but] they complain about Middle East carriers... Etihad also has to make money and in the past Lufthansa was a state-owned airline.

“The real competition is done in the market with product, service and price… In my opinion, Lufthansa should look more on their product,” he adds.

Regardless of the true motives behind the debate, it doesn’t appear to be an issue which is high on the agenda for Merkel’s government, Ambassador and Special Representative for Dialogue among Civilisations and Public Diplomacy Dr Heinrich Kreft, tells us when we meet up for coffee at the Federal Foreign Office.

“No, it’s not [a high priority]. They can put it down on the list… Lufthansa is in such a downturn right now… But this is the debate we are having in the aviation community.”

The Federal Foreign Office reports that Germany currently earns
€7.5bn ($9.8bn) in trade with the UAE and this figure is set to grow in the coming year. With Merkel embroiled in the eurozone crisis and facing financing bailouts, now could be the time for the UAE government to use this as leverage to finally win the much-sought-after landing rights into Berlin.

When it comes to the issue of austerity, Mehdorn uses a marital analogy to push home his point: “Your wife can only spend the money that you bring home and no more.”

With airberlin’s marriage to Etihad now complete, let’s hope the honeymoon period lasts for a long time.

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