The FINANCIAL — Air Berlin PLC has reached its goals for the past business year: Consolidation took place, turnover increased and fleet capacity utilization improved. Furthermore, the airline company announced that the Turkish ESAS Holding A.S. has acquired 15.3 percent of the company's shares.
"Prior to that, TUIfly and Air Berlin had decided to form a strategic alliance for domestic flights and European city connections as of 1 October 2009. In the course of this alliance, a subsidiary of TUI Travel PLC will hold an interest of up to 20 percent in Air Berlin PLC, and, vice versa, Air Berlin will hold an interest of up to 20 percent in TUIfly, via a holding in Hapag Lloyd Fluggesellschaft mbH/Hapag Lloyd Express GmbH. Both of these transactions are subject to the approval of the German Federal Cartel Office," Air Berlin reports.
Concerning the strategic alliance with TUIfly, Joachim Hunold, CEO of Air Berlin PLC, stated: "This strategic alliance gives Air Berlin access to three economically highly interesting markets: Cologne, Stuttgart and Italy. In this manner, Air Berlin can expand its European as well as its domestic route network, which is especially important to our business passengers. At the same time, the position of TUIfly and Air Berlin will improve in this challenging economic environment." Joachim Hunold and Ulf Hüttmeyer, CFO of Air Berlin, welcomed the ESAS Holding A.S. on board. "With ESAS Holding A.S., we have found a new major shareholder that is committed to the aviation industry, replacing AI Aviation Coöperatief U.A., which withdrew its participation at the beginning of January," explained Joachim Hunold. "Despite the challenging economic environment, Air Berlin aims to improve its EBIT as compared to that of the previous year," stated Ulf Hüttmeyer in Berlin on March 30.
Even in the face of an increasingly challenging economic environment, turnover of the second-largest German airline company for the 2008 business year (31 December) increased by 6.7 percent to EUR 3.4 billion. The number of passengers transported increased by 1.2 percent to 28.6 million, despite a targeted seat capacity reduction to 36.4 million. Furthermore, Air Berlin improved EBITDAR (Earnings before interest, leasing expenses, depreciation, amortization, interest and taxes) to EUR 477 million, i.e. an increase of 11.6 percent. Improved revenues in combination with reduced expenditures resulted in Air Berlin reporting a positive EBIT (Earnings before interest and taxes) of EUR 14.2 million at the 2008 year-end press conference in Berlin. This represents an improvement of EUR 35.7 million over the previous year.
At the press conference on the Annual Financial Accounts, held on Monday in Berlin, Joachim Hunold, Air Berlin's Chief Executive Officer, concluded his statement on a positive note: "In an increasingly deteriorating economic environment, Air Berlin has managed to strengthen its position as the second-largest airline company in Germany and has tapped into new passenger markets." For example, the number of corporate agreements has climbed to more than 830. Hunold noted that the measures introduced in the spring of 2008, in the context of the "Jump" performance improvement program, had prepared the airline company for the global economic challenges ahead. "We were the first airline company to implement a multitude of measures, enabling us to react to fluctuations in demand in a highly flexible manner, thereby achieving an improved operating income," stated Joachim Hunold. All in all, the positive results for the first half-year of 2008, together with the "Jump" performance improvement program, resulted in a notable improvement of fleet capacity utilization for the entire year. The capacity utilization of Air Berlin's fleet of 125 airplanes increased by 1.1 percentage points to 78.4 percent. For the current business year, which incidentally marks the 30th anniversary of the airline company's foundation, the main emphasis will lie on further improving profitability. "Our target for 2009 is to improve the EBIT as compared to that of the 2008 business year," stated Ulf Hüttmeyer, Air Berlin's Chief Financial Officer.
In the past business year, by virtue of continuous and strict cost control and performance monitoring, EBITDAR, the most important operating profit margin in the airline industry, increased from EUR 15.5 to EUR 16.17 per passenger, i.e. an increase of 10.2 percent over the previous year. ASK (+17.2 %) and RPK (+15.9 %) also improved substantially. The increase of total operating costs at the EBITDAR level, without taking into account kerosene prices which are virtually uninfluencable in the first place, was limited to 1.4 percent. Likewise, both the cost per available seat kilometer (ASK), which increased by 6.6 percent, and that of revenue per passenger kilometer (RPK), which increased by 5.4 percent, were clearly below average.
In essence, two opposing influencing factors characterized income development in 2008. On the one hand, the "Jump" performance improvement program led to a marked improvement in operating income. In this manner, despite the high additional costs due to the sharp increase in fuel prices, operating profit (EBITDAR) increased by 11.6 percent. On the other hand, a considerable weakening in financial performance set in. This was mainly caused by a high interest expense with no effect on liquidity, and was a result of the critical distortions in the global financial markets. Consolidated profit sank from minus EUR 40 million to minus EUR 75 million.
Personnel expense increased from EUR 420 million to EUR 446 million, i.e. an increase of 6 percent over the previous year. Other operating expenses merely increased by 1.5 percent to reach EUR 515.9 million. This result reflects performance optimization in the technical divisions, limiting the relevant expenditure increase to only 2.2 percent. The cost for facility and vehicle management, advertising, insurance and marketing was reduced in absolute numbers, in part even by double-digit percentages.
Including the substantial increase in fuel costs, the increase of total operating cost at the EBITDAR level, at plus 6.1 percent, is slightly below the level of increase of aggregate operating performance. In comparison with the rise in ticket sales, the increase of total operating cost was substantially below average. As a result, the important profit figure EBITDAR increased to EUR 477 million (2007: EUR 427 million) for the 2008 business year. In particular due to the number of expensive Wet Leases in 2008, leasing costs climbed from EUR 341.5 million to EUR 359.5 million, i.e. an increase of 5.3 percent. Depreciation and amortization decreased, as planned, by 4 percent to EUR 103.1 million. This resulted in a positive EBIT for the 2008 business year. EBIT increased by EUR 35.7 million, i.e. from minus EUR 21.5 million (2007 business year) to EUR 14.2 million.
For the 2008 business year, financial performance retreated to minus EUR 72 million (2007: minus EUR 39.9 million). This development results essentially from expenses connected with the foreign exchange hedging of USD-denominated loans for aircraft financing. These loans are primarily hedged via Cross Currency Interest Rate Swaps (CCIRS), wherein market value changes of the interest component are compensated by currency-dependent translation effects. In the course of the fourth quarter, as a result of the chaotic conditions in the global financial markets, swap rates fell substantially within a very short time period. For example, the relevant five-year maturities fell by almost one- third, i.e. by more than 150 basis points. Due to this development, the interest component of the CCIRS currency hedging is subject to market value changes with no effect on liquidity, amounting to minus EUR 29 million, which had to be included in the financial results. In the course of paying back the USD loans, these losses will be cut back gradually.
Despite the additional expenses resulting from the escalation of the financial market crisis towards the end of 2008, earnings before taxes for the business year improved slightly to minus EUR 57.8 million (2007: minus EUR 59.4 million). After taxes amounting to EUR 17.2 million, net earnings for 2008 totaled minus EUR 75 million (2007: minus EUR 39.9 million). In 2007, tax credits amounting to EUR 19.5 million (of which EUR 8 million in the context of the German Corporate Tax Reform) were applied.
The tax expenditures for 2008 primarily result from the write-off of deferred tax assets stemming from loss carry forwards (EUR 20.8 million) due to restructuring measures. The profit per share, based on 65.539 million shares outstanding, amounts to minus EUR 1.14 (undiluted and diluted), following EUR 0.33 reported for the previous year (based on 64.115 million shares). The Directors recommend that no dividend is paid.
Consolidated total revenue for the 2008 business year increased to EUR 3.4 billion (2007: EUR 3.2 billion), i.e. an increase of 6.7 percent. With 7.6 percent, ticket sales increased above average to EUR 2.9 billion. Individual ticket sales increased by 14 percent, i.e. from EUR 1.645 billion to EUR 1.75 billion, whereas sales revenue from tour operators and charters decreased slightly to EUR 1.229 billion, i.e. a decrease of 0.5 percent.
Optimization of the route network
The strategic partnership with TUI Travel PLC, which provides for a cross ownership, in which TUI Travel PLC through a subsidiary will have an interest of 19.9 percent in Air Berlin PLC, and, vice versa, Air Berlin PLC will hold 19.9 percent of Hapag-Lloyd Fluggesellschaft mbH, will expand Air Berlin's route network within Germany and Europe. The central component of the agreement is for the previous city flight business of TUIfly to be transferred to become the commercial responsibility of Air Berlin, starting with the 2009/10 winter flight schedule.
Of the total of 38 aircraft that TUIfly will operate from 2010, 17 planes will be chartered to Air Berlin via a long-term Wet Lease (i.e. including the crews). This strategic alliance gives Air Berlin access to three economically highly interesting markets: Cologne, Stuttgart and Italy. "With the strategic partnership, we are acquiring a primarily complementary European route network, thereby strengthening the position of TUIfly and Air Berlin in this challenging economic environment. At the same time, our flight program will become more attractive for business passengers in Europe, because important metropolitan areas will now be even better served, due to the strategic cooperation," stated Joachim Hunold. "In total, we expect synergies of EUR 20 million to be obtained from acquiring the city connections from TUIfly," stated Ulf Hüttmeyer in Berlin on March 30.
In 2008, the total number of airplanes increased by one, to 125 (2007: 124). However, the composition of the fleet changed drastically: As planned, a total of 23 new planes featuring state-of-the-art technology have replaced older planes which had a higher fuel consumption and lower efficiency. For instance, all ten Fokker 100s and all ten Boeing 737-300s have been replaced. In this manner, Air Berlin's fleet became even younger. Whereas the average age of the fleet amounted to 5.2 years in 2007, by the end of 2008, the average age had dropped to 4.6 years.
Outlook for Air Berlin
Over the next two business years, Air Berlin will especially focus on further strengthening profitability. For that purpose, the successfully implemented "Jump" performance program, which has led to a significant improvement of turnover, income per available seat kilometer (ASK) and revenue per passenger kilometer (RPK), will be of prime importance.
Operations will be subjected to a continuous and strict cost control, and any opportunities for performance improvement on the ground and in the air will be consistently explored and implemented. In this context, the introduction of the latest technologies, such as the Q400 turboprop aircraft, first used in 2008 and featuring significantly lower fuel consumption, is of great importance. Air Berlin had ordered a total of ten Q400s, two of which were put into service in 2008. The remaining eight aircraft are expected to be put into operation by August 2009, replacing older aircraft.
In addition to the consistent improvement of operational performance, Air Berlin's priority lies in strengthening its balance sheet. For instance, the company intends to reduce indebtedness in a targeted manner, by selling strategically unnecessary assets or activities. In January 2009, concrete negotiations regarding some of these measures already took place.
Air Berlin does not strive to expand its existing route network at the expense of profitability. Nevertheless, opportunities for growth will continue to be exploited in the future, provided that corresponding income prospects are present. This applies particularly to the expansion of attractive routes and feeder networks, together with our strategic partners, and to our increased targeting of select clients, such as business passengers. For the current business year, Air Berlin intends to transport up to 27.3 million passengers, with a seat capacity utilization ranging from 77 to 77.6 percent. According to Ulf Hüttmeyer, Air Berlin aims to improve its EBIT as compared to that of the previous year.