Air Berlin's Magnificent Flying Bankruptcy Machine
(Bloomberg Gadfly) -- If you want to know why Air Berlin Plc has filed for insolvency protection, look at this chart:
Yep, those free cash flow numbers are all negative and they add up to minus-2 billion euros (minus-$2.3 billion).
That wasn't insurmountable when anchor shareholder Etihad Airways PJSC was propping up the company. But on Tuesday, Etihad, which has a 29 percent stake and supplies plenty of debt financing, effectively pulled the plug. It won't provide any more financial help and its two representatives have quit Air Berlin's board.
Air Berlin's collapse is alarming for its almost 9,000 employees, but it's been a long time coming. The company has about 1.2 billion euros in net debt and minus-1.8 billion euros of shareholder equity, according to Bloomberg data. Compared to budget carriers such as Ryanair Holdings Plc and EasyJet Plc, which are busy adding capacity and cutting fares, Air Berlin's cost base was simply too high.
Gulf carriers like Eithad were once feared in Europe but they're struggling now, as Gadfly colleague David Fickling has explained. Etihad's strategy of buying minority stakes in various far-flung airlines appears to have been particularly ill-conceived: the Abu Dhabi hub carrier reported a $1.9 billion loss for its 2017 fiscal year. Another Eithad investment, Alitalia SpA, filed for bankruptcy in May.
In theory, these airline failures should be an opportunity for the needed consolidation of Europe's skies, which are far more fragmented than in the U.S. It makes European airlines susceptible to adding too much capacity, at little profit. The five biggest carriers on the continent control just 46 percent of the market, whereas in the U.S. just four carriers have a stranglehold on more than two-thirds of the domestic market.
But don't bet on things changing in a hurry. Lufthansa hopes to profit from its rival's troubles and has already leased some of its planes for its own new low-cost airline, Eurowings. The German government, perhaps conscious of federal elections next month, has offered Air Berlin a bridging loan.
Ryanair and its ilk will be scouring for opportunities too to push into the German market. The Irish carrier is one of several airlines to have submitted non-binding bids for Alitalia. That could mean Europe's oversupply of airline seats ends up being preserved -- albeit at airlines with stronger balance sheets. Expect more of the same rather than up, up and away.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.
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