Can Air Berlin shrink to survive?

Looking for drama around short-haul airlines in Europe? Monarch provided a splash of color over the weekend but the bigger news this week is expected to come from Air Berlin, with a major reorganization on the horizon. It is possible that Air Berlin will end the week at half its current size, shedding aircraft in deals with Lufthansa and TUIfly and also shedding approximately 1,000 employees, just over 10% of its workforce.

Air Berlin has been bleeding cash for years. Losses of $1.3bn in the past three years were offset by increased investments from partial owner Etihad but now it seems that major structural changes will come rather than just more funding. Air Berlin pursued rapid fleet and route expansion in an effort to gain market share. That expansion came in the face of heavy competition from Ryanair and easyJet, forcing fares to remain low. Even as it tried to improve the on-board product and improve yields the competition held firm. For the mostly short flights the carrier operates getting passengers to pay a premium simply isn’t working.

The plan calls for Air Berlin to cede approximately 40 A320 family aircraft into Lufthansa’s Eurowings subsidiary. Another 30+ aircraft – some of which are TUI wet leases – would shift to the TUIfly operation. And Air Berlin would effectively kill all of its short haul operations that do not feed long haul flights at its Berlin or Dusseldorf hubs. TUI and Lufthansa/Eurowings would continue to grow their point-to-point operations as Air Berlin shrinks back to being a niche network carrier with a simple hub-and-spoke operation. Etihad still needs the connectivity from Air Berlin to those hubs in order to connect travelers onward to North America and the Middle East but the point-to-point routes were not contributing to the larger goals.

Dropping the point-to-point routes is unlikely to affect Air Berlin’s plan to add a business class option to its short haul fleet, thougyh obviously it would be a much more limited deployment. And the product was pretty limited based on the announcement so that might not matter too much in the end anyways.

Scaling back the operations may prove to be just what Air Berlin needs to survive but it will have a follow-on impact to many partners, especially in the oneworld alliance. Air Berlin is the groups most significant presence on the European continent and allows for travelers to move between many destinations on the continent. The other partners sit on the edges of Europe (London, Madrid, Helsinki) limiting easy flow. And while oneworld historically focused more on moving passengers across longer distances recent growth seemed to be about connecting the dots on shorter trips. This is a step backwards on that front.

I also cannot help but wonder just how much of Air Berlin’s struggles come from the disaster that is the Brandenburg airport situation in Berlin. Sure, everyone is affected by the new terminal not opening, but it seems that Air Berlin was disproportionally exposed to the inability to grow and the challenges of creating connecting flow at Tegel versus the new facility.

Convincing a larger competitor to take on risk and responsibility is a risky move. Lufthansa could use this as the boost it needs to better compete against Ryanair and easyJet and further pressure Air Berlin along the way. But given the dearth of viable choices for Air Berlin it may be the only option at this point.

Header Image: Air Berlin A320 by Silvio Kelch via CC-SA