FOXTROTS

Fox – sly.  Trots – left-leaning (Trotsky) plus its more insalubrious meaning.

Foxtrots – leading the industry in a dance.

 

PAGPFT. Air Berlin surprise – why did it take so long?

PAGPFT (pronounced PAG-puffed); People Are Getting Paid For This.

We are surprised that observers are surprised about AB’s planned substantial (about 33%?) downsizing*.

 

PAGPFT.

 

Those responsible – 30% owner Etihad, its CEO James Hogan, AB’s CEO Stefan Pichler – should be smart enough to see not only that its hybrid businessplan was not working, but also that it was fairly clear that it would not work.

 

We are not wise after the event. We said in:

 

[] 2006. ‘AB’s costs are higher, and we are not yet convinced that it will survive with its current cost structure.”

 

[] 2007.

-‘We wonder about AB’s potential, now a hybrid.

-‘We asked Joachim Hunold, CEO, if he will change the company’s name (on the basis that today only 8% of its business is to/from Berlin)? “No, because when people hear the name ‘Berlin’ they think of ‘Germany’.” He is wrong; we believe most people think of AB only when they are flying to/from Berlin.

 

[] 2008. ‘We do not have great confidence in AB’s hybrid businessplan.’

 

[] 2009. ‘AB is trying to be everything – NFA┼, charter airline, FSA┼ – and which no longer inspires confidence.’

 

[] 2011.

-‘Joachim Hunold, CEO 1991-2011, has left. However, he constantly made changes to core strategy. AB has been a small FSA, a charter airline, and an NFA. It is currently all three; a hybrid.

-‘We have long criticised Hunold’s hybrid strategy as “dysfunctional”, adding “we do not have great confidence in the hybrid businessplan for smaller airlines”.

-‘Before he left, and the reason he left, Hunold cut the airline’s capacity by 1mn seats. Although that looks a lot, it is only about 3%; it sold 32mn seats in 2010. But AB’s seat factors are low, and that is bad. They were in the 70s in the first few months of the year, and although they have since increased, YTD is still only 77%.

-‘Four years ago, we noted AB’s seat factors needed attention: “AB does not follow the proven NFA business model – it offers free meals on some flights, for instance – and so these practices would increase its costs, and possibly push breakeven SF back up to near 80%.”

-‘However, AB seems have wanted to become a FSA, and it is still due to join the Oneworld alliance in 2012.

-‘AB’s acquisitions include another mixed-bag, raising questions again on strategy. They included: Niki, a failing NFA in Austria; Belair, a charter airline in Switzerland; part of Condor, a Lufthansa-owned hybrid; DBA, once a British Airways subsidiary that was an FSA, but converted to a NFA operation before being sold; and part of tour-operator TUI’s failing airline business. Will all these parts work together?

-‘Before he left, Hunold cut back some routes and hubs, to concentrate on Berlin, Dusseldorf, Mallorca, Vienna. This is still too many for a hybrid, and workable only if AB becomes an NFA-only.

 

[] 2012.

-‘AB needs help, but Etihad has no apparent expertise in solving their problems. Etihad has made no strategy-related statement on its acquisition, and its activity so far has been limited to cross-marketing activity. Given the markets involved, these seem unlikely to make any great difference.

-‘What will James Hogan, head of Abu Dhabi’s Etihad Airways, do with Etihad’s ownership of AB?

-‘He is known as a competent airline executive (despite the fact he made no impression at Gulf Air, which he ran before moving down the gulf to Etihad). And AB is in trouble – bad, as far as we are concerned.

-‘The long-time previous head, Joachim Hunold, changed the airline into a hybrid – NFA, charter, and FSA – as well as buying Austria-based Niki, which is not doing as well as it should as an NFA.

-‘Hogan has three choices, worst first:

  1. ‘Make AB a FSA feed for Etihad. That means changing its route plan so that, for instance, it could feed from all European Union markets into Abu Dhabi for onward carriage by Etihad.
  2. ‘No change, although that might mean continuing losses. In turn, that would seem a flawed idea for a costly investment, although there is ‘prestige’ in the Middle East in owning a German airline. Plus, Germany’s economy looks good, so business may get better. However, ‘no change’ must mean some tweaking of AB’s losing hybrid businessplan.
  3. ‘Replicate Etihad’s businessplan – which it had copied from neighbour Emirates, which copied from Singapore Airlines. That would involve AB feeding traffic to/from all over Europe to/from all over North America via Germany. There are a few changes needed before that can happen, the most important of which is for AB to concentrate its operations in Berlin; despite its name, it does not do that at present. But that would probably mean dropping some routes, such as Bangkok.

 

[] 2013.

-On AB’s Wolfgang Prock-Schauer, taking over as AB CEO from Hartmut Mehdorn, interim CEO 2011-3, who took over from Joachim Hunold.

-‘We interpreted that Mehdorn/Hunold change as an admission that the airline was in trouble.

-‘There is no clear indication that AB is making sizeable changes from the policies that lead it into difficulty in the first place. In general, this is its hybrid businessplan –FSA, charter airline, and still some remnants of a NFA.

-‘It has a market image that matches that structure – confused. Worse, Berlin is not really its home in the route sense. Then there is its new membership of the Oneworld alliance. That may give AB more FSA credibility, but the hard truth is that Oneworld needed a member in Germany, and as Lufthansa is a founding member of the rival Star alliance, OW had no choice.

 

[] 2014.

-‘AB’s name, because of its network, should be Air Germany. It has a reasonable network, not just within Europe, but to North America as well.’

-‘AB has major problems. Despite statements of its contributions in passengers to Etihad, in total it sold 2% fewer seats in 2013, and 1% fewer YTD-2014.’

-On AB’s Stefan Pichler new CEO, from Fiji Airways:

 

‘Before FA, he ran Jazeera, a Kuwait-based no-frills-airline that is comfortably profitable. Before Jazeera he was deputy CEO at Virgin Australia. That period was not so successful – although he was not CEO. AB says Pichler launched V Australia, VA’s failed longhaul venture, and which has now been largely dismantled.

 

‘Before VA, he headed Germany’s Thomas Cook, but was fired. At that time, TC was more closely controlled by Lufthansa – where he had also worked, including running sales and marketing worldwide.

 

‘AB credits Pichler with directing many things at these companies where he was simply one of the actors.

 

‘There are serious strategic problems for AB, and now for Pichler. Yet his operational flexibility will be limited by Etihad management.’

 

[] 2015.

-‘AB is an unsustainable hybrid operation.

-‘AB’s 2014 revenue hardly grew – +0.3% to US$4.62bn. But losses grew a frightening 31% to US$338mn. AB targets profits in 2016.

-‘The growth/profitability strategy from hereon appears to be to rely on partners, particularly Etihad and Alitalia, also part-owned by Etihad.

-‘There is no clear future for Niki, the AB subsidiary that was a NFA, but which now appears to have no place in the new Etihad-driven strategy. We presume it will be shut down, or become an Etihad regional airline, as Swiss-based Darwin (sic).’

 

[] 2016.

-‘Wizz, Hungary-based NFA but with extensive coverage in many parts of East Europe, is on track to overtake hybrid AB in 2017.

-‘Traffic for Q1 shows that Norwegian from nano Norway overtook AB from giant Germany in terms of seat sales. And it is growing faster as well – +17% against -7%’.

 

 

 

*NOTES

End-September, AB announced many changes, including:

-Pichler said restructuring was necessary due to “significant external market pressures which dictate a change to our current complicated business model”.

-Just two hubs – Dusseldorf, Berlin.

-What AB calls its ‘tourist’ operations will be moved into a new company, and presumably put up for sale.

-Reduce fleet from around 150 to 75, -50%, with around 40 A320s going to Lufthansa’s Eurowings hybrid subsidiary, with most of those on wet leases, which means cockpit crew included. That would leave AB with 17 A330s, 40 A320s. And 18 Q400s – Bombardier’s 90-seater previously known as Dash-8.

 

 

┼Our definitions:

-FSA = full-service-airline. Offering first/business/economy, travel agency bookings, meals/bookings/baggage/cancellations included, etc. As its name indicates – full service.

-LCA = low-cost-airline. (Not a no-frills-airline; see next.) An FSA but with lower operating costs – cheaper longer-hours flight-deck crew, younger/new longer-hours cabin crew, tighter cost control (twinned 3-star hotel rooms, for instance), fewer fare types, which may have first and business cabins, and which allows bookings through travel agencies etc. If relevant, usually similar to the parent airline, but a different name, and competition against parent airline allowed.

-NFA = no-frills-airline. We believe that among the many essential elements that make a successful NFA are: market freedom in terms of routes and aircraft choice; single aircraft type; where relevant, competition against parent airline allowed; fares that are extremely low when booked at least three months in advance, say US$25; one fare at one time (no wholesale rates, travel agency commissions, etc); no refunds; no service frills; single economy-class cabin; no seat selection; two toilets for 150-seat aircraft; 25-minute turnaround time; cabin crew do daytime cabin cleaning; name and flight change charged at least US$25 each; no trade shows; plenty of consumer advertising and promotion; and much more.

 

 

 

The Fox

Remember, I’ll be famous after I’m dead.

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