Air Berlin reports strong full year 2006 results / Air Berlin acquires LTU / Code Share now with Condor instead of TUIfly



Air Berlin delivers a net profit of € 50.1 million for its financial year 2006, following a net loss of € 115.9 million in the previous year. The airline managed not only to grow its revenues but also to lower its cost base. Air Berlin PLC also announces that it has agreed to acquire 100 % of the Dusseldorf based airline LTU. Through this transaction, the Air Berlin group will become the largest airline in the most important German source market with a catchment area around Dusseldorf of approximately 18 million inhabitants. The combination is expected to produce annual synergies of € 70-100 million. Air Berlin also changes its code share partner; Condor will replace TUIfly.


The Results

"We are very happy with what he have achieved", CFO Ulf Hüttmeyer said. Air Berlin had been able to increase its yield per available seat kilometre (ASK) by 11 % in 2006. The share of single-seat sales, which makes the company largely independent from price pressure by the large German tour operators, had increased from 56 % to 60 % of flight sales. However, tour operator sales also increased in absolute terms, from € 497 million to € 590 million, representing an increase of 18.8 %.

In total, annual revenues reached € 1.57 billion in 2006. After € 1.22 billion in 2005 this is an increase of 29.6 %. "Both our good organic growth and the acquisition of dba, which we consolidated from September, contributed to this development", Hüttmeyer declared. Excluding dba, Air Berlin’s revenues increased by 16.2 % to € 1.41 billion.

The cost efficient distribution through the internet has gained in importance for Air Berlin. Sales through this distribution channel increased by 33.5 % in 2006 compared to 2005, from € 322 million to € 430 million. This represents about 50 % of revenue from single-seat sales. Ancillary sales also had a very positive development, rising by 89 % from € 30.8 million in 2005 to € 58.1 million in 2006. On the other hand, cost per ASK (excluding fuel) were decreased by 6.3 %. The proportion of fuel costs over total expenses increased from 19.7 % to 22 %, which was a development impacting the entire airline industry.

The operating profit (EBIT) improved by a total amount of € 70 million compared to the previous year, from -€ 5.5 million to € 64.1 million. The EBIT margin is 4.1 %. For the current year, Hüttmeyer is expecting an increase to between 6 and 7 %. This also includes synergy effects arising from the acquisition of dba in an amount of € 31 million.

The net financial result also developed favourably. While the 2005 result was burdened with (non-cash effective) foreign exchange losses of € 65.4 million, Air Berlin was able to improve it to -€19.7 million due to the introduction of interest rate and foreign exchange hedging measures, despite IPO expenses of € 13.7 million. Income taxes developed in a similar way: in 2005, the net result was burdened by approximately € 45 million, while the company expects a net tax benefit of € 4.9 million in 2006.

The equity ratio as per 31 December 2006 was 28.2 %, after 18.6 % at the end of 2005. Earnings per share amount to € 0.95. "Thereby we have not only reached the goals that we had set ourselves at the time of our IPO but we have even exceeded them", Ulf Hüttmeyer said. For the current year he expects continued passenger and revenue growth "above the industry average – although one cannot expect double digit yield increases anymore".


The LTU Acquisition

On Monday evening, Air Berlin agreed to acquire 100 % of LTU for € 140 million in cash plus the assumption of between € 190 and 200 million of net financial debt. The agreement is conditional on the approval of the German Federal Cartel Office. The acquisition will be financed in the near future primarily through the issuance of equity and convertible bonds in a total amount of approximately € 250 million. The issue of shares will be for up to 10 % of the existing share capital and the larger portion of the financing will be in the form of convertible bonds. In addition to funding part of the purchase price, the proceeds from this financing will be used for the refinancing of approximately € 100 million of LTU’s debt and approximately € 50 million of Air Berlin’s debt.

"With the acquisition of LTU we are reacting to demands from the market. Many of our customers, who especially appreciate our good service offering, have been asking us for many years to start offering long-haul flights. This is now possible for us, as we have the necessary feeder network through our European and domestic German connections", Joachim Hunold explained.

Hunold expects the integration of LTU into the Air Berlin Group to yield synergies of between € 70 and 100 million. Among other things, he identified joint purchasing and marketing, flight schedule harmonization and cost reduction through volume discounts at airports as "key drivers" to obtain these synergies. Although restructuring measures cannot be excluded, the acquisition does not aim to curb manpower at LTU. As Hunold stated: "For consistently growing the Group, we need a skilled and motivated staff. I am still acquainted with a lot of my colleagues from my previous work experience at LTU. That was the most successful period in its history. Since I believe in LTU and its staff, I see a future for the company."

LTU will remain a legally independent company within the Air Berlin group, with its own management. The LTU name will also be retained in the foreseeable future. However, there will be a seamless integration of LTU’s routes into Air Berlin’s network in the European market. At present, LTU operates 15 medium range and 11 long range aircraft. Its most important destinations are the Dominican Republic, the United States, Thailand, the Canary Islands, Northern Africa and Turkey. The company had 2.244 employees as per 31 December 2006 and carried 5.3 million passengers last year. Air Berlin carried 16.8 million passengers in the same period, operates 93 aircraft and currently employs about 4,000 people.

Through the acquisition of LTU, Air Berlin will become the fourth largest airline for European traffic, behind Ryanair, Air France/KLM and Lufthansa. One of the primary motivations for the acquisition was the possibility to improve Air Berlin’s position at Dusseldorf airport, according to Hunold. "The catchment area of Dusseldorf airport is the most important market in Germany and the second most important in Europe, behind London. We would not have been able to grow at this airport organically, due to the limitation of departure slots", Hunold explained.


The Code Share-Agreement

Air Berlin also changes its code share partner; Condor will replace TUIfly. In the code share agreement with Condor, Joachim Hunold sees advantages both for the customers and for the two companies. Air Berlin, LTU and Condor will co-ordinate their respective flight plans and cross-sell their tickets. Advantages for customers will arise from a broader service offering: the three companies’ aircraft will, for example, not anymore fly to the same destinations in parallel but at different days of the week.

Condor, which belongs to the Thomas Cook travel group, currently operates 36 aircraft and carried 7.8 million passengers in 2006. Through the code share with LTU, both airlines will improve their position in the long haul sector. While LTU and Condor both rely primarily on tour operators and travel agencies for their distribution, Air Berlin’s strengths are in single-seat sales as well as sales over the internet. Besides, the Berlin airline has a high proportion of business travellers.

The Hapagfly airline, which belongs to the TUI group, has benefited in the past years from Air Berlin’s distribution power. Air Berlin is terminating its code share agreement with this airline by the end of the winter flight plan 2006/2007. Hunold cited the repositioning of Hapagfly (recently re-branded TUIfly) as a competitor as the reason for this decision. Also, tour operator customers showed reluctance to book their customers onto flights operated by their competitor TUI. TUI’s tour operating business will, however, continue to be a customer of Air Berlin.


Participation in Belair

Air Berlin’s Management stated that Air Berlin PLC intends to acquire a 49 percent stake in the Swiss airline company, Belair Airlines AG. Belair is a subsidiary of the Hotelplan Group which, in turn, is fully-owned by the Migros Group. Hotelplan AG is an internationally active travel organization, employing 2,960 employees and generating a business volume of approximately 2 billion Swiss francs. Belair currently operates a fleet of three airplanes: two Boeing 757-200 and one Boeing 767-300. While Air Berlin aims to increase its activities in the Swiss market, Hotelplan considers the integration of Belair into Air Berlin’s marketing and logistics advantageous. The purchase price was not disclosed. The approval of the Cartel Office is still required for the agreement to take effect.