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Air Berlin on a shopping spree
By Sebastian Steinke
“We remain realists and do not talk boastfully about attacking Lufthansa,” says Peter Hauptvogel, Director of Corporate Communications at Air Berlin, in response to a question from FLUG REVUE as to what his company's next growth targets might be. “It would be presumptuous to see us as being of the same order of magnitude. Nor do we aspire to any particular ranking among the airlines. We just want to grow as long as it makes business sense. But if in so doing we take market share away from Lufthansa, we can live with that.” Based on the number of seats offered, and including LTU, Air Berlin is already in fourth place in the European air travel market, after Ryanair, Air France/KLM and Lufthansa.
Hauptvogel explains that the latest spurts of growth by his company, the acquisition of dba and the takeover of LTU which was only approved by the German Federal Cartel Authority on 8 August, had been a mixture of chance sales and qualitative additions. “When we took dba over, we acquired its dense domestic network, which is attractive to business travellers. Then we wanted some trunk routes which we would be able to fill with our feeder flights from Germany and Europe. LTU was just the right opportunity here, and it was always our strength to exploit opportunities.” Thanks to its multiple supporting pillars, he believes Air Berlin now has a sufficiently broad base to cope if things were to deteriorate in one area.
Every new route which Air Berlin adds has to satisfy three criteria: firstly, it has to satisfy a tourist demand, secondly there must also be demand from business travellers and thirdly passenger demand must be balanced in both directions. Occasional exceptions, such as the “one-sided” pilgrim connection from Münster to Rome offered during the summer months, or the Air Berlin flights to Sylt, only confirm this rule. According to Hauptvogel, the ideal examples of route strategy are the connections from Berlin to Zurich and Vienna. The first of these achieves 60 percent incoming traffic from Switzerland, while the numbers of passengers travelling to and from the Austrian capital are more or less equal. “That makes marketing sense,” he says.
In order to be able to efficiently concentrate the use of advertising in a destination area like Majorca, the airline is happy to fly to a foreign destination from many different German departure airports in a star-shaped fashion. From Palma, for example, one can fly non-stop onboard Air Berlin jets to 18 German airports, including Rostock and Saarbrücken, but also to numerous other European destinations, for example, to London, Paris, Amsterdam, Copenhagen, Helsinki, Moscow and Rome. “Other airlines serve 10 to 20 destinations from a single German airport, whereas we do the reverse,” explains Hauptvogel. For example, one can fly with Air Berlin to London, Vienna and Zurich each from 5 to 7 airports.
It was in Switzerland that the Berliners landed their latest coup with the acquisition of a 49 percent stake in Belair Airlines AG. The rest of the Swiss company, with its 2,960 employees and two Boeing 757-200's and one 767-300, belongs to the Hotelplan Group, which is owned by the Swiss trading conglomerate Migros. While Hotelplan will now benefit from the Air Berlin's dense sales network, “We will now be able to fly all our international routes from Switzerland as well,” explains Joachim Hunold, Chief Executive of Air Berlin. On the other hand, only in June Air Berlin denied any interest in taking over Spanair.
In the Iberian foreign market and in Palma, its most important hub, Ryanair has recently been making life difficult for Air Berlin with cut-throat prices to Liverpool, London, Düsseldorf-Weeze, Frankfurt-Hahn and Pisa. It is Ryanair, rather than easyJet, whose concept is more similar to Air Berlin's, which is viewed as the arch rival.
“Ryanair is a model which is on the way out,” says Peter Hauptvogel. “They fly from nowhere to nowhere, to any remote farmer's field where they can get a subsidy. But the EU is getting stricter.” At first sight the Irish may appear cheaper, but they also offer a poorer service. “Would you rather travel with a cattle truck or a proper service?” He asks rhetorically.
In actual fact, Air Berlin offers a standard of onboard comfort which these days is quite rare on internal German and European main routes. As well as newspapers and magazines distributed without charge, every passenger is served a drink and even a small snack onboard. For just five to ten euro extra on the ticket price, you can also order hot à la carte meals prepared by the Sylt-based celebrity restaurant, Sansibar, on flights of over 90 minutes' duration, for example to the Canary Islands or Egypt. On long-haul flights, the creature comforts offered include films on ceiling monitors and onboard entertainment through earphones (at a charge), and the service surpasses that of many classic scheduled airlines.
Despite this, Air Berlin's prices are often towards the bottom of the middle section of the market. For example, as of the end of August the keenest prices available on the trunk route to Majorca for the month of October were around €49 (one-way), including charges, from a large variety of German departure airports.
“We are the first hybrid carrier in Germany to have leisure and business travellers on short-, medium- and long-distance routes,” says Hauptvogel, explaining the concept of the company which, as a plc under British law, is traded on the London stock exchange. On the other hand, its aircraft fly under the German flag.
“We were always a low-cost airline and produced at low cost without a bloated bureaucracy,” Hauptvogel recalls. Thus, Air Berlin achieves high utilisation on its jets as these are able to fly three round-trips per day to Balearic Islands because the airline systematically cultivates airports which allow night-time flights, such as Münster, Paderborn and Nuremberg. By contrast, if one is confined to daytime flights, only two round trips are possible. “After all, planes are meant to fly, not to sit on the ground.”
Moreover, tough cost objectives imposed by the tour organisers with which Air Berlin first started up operations in the charter market from Berlin Tegel in April 1979, forced the airline to develop highly efficient structures early on. “Between 1992 and 2001 the tour organisers did not raise their prices for our industry,” Hauptvogel recalls.
The fear of flying of many passengers in the aftermath to the terrorist attacks of 11 Sept 2001 then led to a slump in demand, reducing ticket prices, and the no-frills airline concept was born in Europe in 2002 in response. “We decided to go not for absolute cut-throat prices, but for value-for-money combined with comfort,” is how Hauptvogel summarises the strategic orientation of his company. “There are enough customers who value that. It is that which makes us stand out.”
But as a result Air Berlin faces attacks on two fronts, from ultra-low-fair airlines likes Ryanair and from established scheduled airlines like Lufthansa. “€333 from Düsseldorf to the USA – those are dumping prices with their costs,” is Hauptvogel's indignant response to the special offers recently announced by Lufthansa, which from next spring will have its own competing A340 long-haul fleet based in Düsseldorf, LTU's home base, with its huge domestic market of 18 million inhabitants within a 100 km radius. On the other hand, Air Berlin is cooperating with a new codeshare partner in Condor.
Air Berlin has taken the bull by the horns and on 7 July became the biggest European 787 customer by ordering 25 of the particularly economic Boeing 787-8's, with options to purchase a further 25. The 15,200 km range twin jets are due for delivery between 2013 and 2017. Air Berlin plans to configure the cabin for long-haul flights with 272 seats, 30 of them reclining seats in the new Business Class.
Whether by then the Air Berlin brand-name will be used throughout the company, including on jets flown by the former LTU, itself a long-established brand-name within Germany, is the subject of a study by a well-known management consultancy firm, which is also tasked with developing a strategy with which to respond to Lufthansa's assault on Düsseldorf. Lavish advertising campaigns are planned for the expansion to new long-distance routes, for instance in China and the USA, and before they get under way the company has to decide how it wants to project itself. Whereas Air Berlin CEO Joachim Hunold expressly stated at a press conference in Seattle on the evening that the Boeing order was announced that these 787's would be used by LTU, the Boeing computer images bear the logo of Air Berlin. Both brands have recently acquired standard white and light red aircraft colours, which are the same apart from the logos. LTU's newest A330 is also painted in this colour scheme.
The cabin configuration of all the A330's is to be changed from its present 18 seats in Business Class to 30 more comfortable reclining seats with seat pitch raised from 106.7 cm to 152.4 cm. “We are converting them as quickly as we can get the seats,” explains Hauptvogel. He believes it is not just well-heeled business travellers who will value and be prepared to pay for increased onboard comfort, but affluent owners of holiday villas travelling to the Canaries as well. Air Berlin's Top Bonus frequent flyer programme already has about 500,000 members, and its corporate customers number 400 companies, including “some of the most prestigious names on the DAX”. Both within Germany and also within Europe, Air Berlin already carries more business travellers than private customers.
As the combined new number one at the Düsseldorf hub, Air Berlin and LTU want to make life easier for passengers on the ground as well. This includes easier “airside” transfers, i.e. so that passengers no longer have to pass through further security checks, and extended shopping facilities, into which Düsseldorf airport plans to invest a three-digit million amount. Up to 55 daily Air Berlin feeder flights will fill LTU's long-range jets with additional non-local passengers.
“When Thyssen sells a plant abroad, first you get the sales team flying to the customer, then the engineers, then the sales staff again, then the installers, then customer service and then the sales team out to sell the next plant,” is how Hauptvogel assesses the revenue potential of Düsseldorf. He is much more critical about the potential of Berlin. “Berlin's opportunity lies in incoming tourism or in Chinese or Japanese travellers on trips to Europe. Berlin needs feeder flights and does not have that strong an economy.” Despite this, Air Berlin is still planning to build its new corporate headquarters at Berlin Brandenburg International airport, complete with a hangar.
In its fleet planning, Air Berlin assumes an equal mix of leased and fully owned aircraft. Only relatively close to delivery of all the new Airbus A320's and Boeing 737's will the airline decide what form of financing to go with. Independently of this, every individual aircraft has to earn its keep. If demand were weak, it would be relatively simple to return leased aircraft or to sell its own aircraft without making a loss. After ten years, the aircraft are currently still worth around 60 percent of their list price. On the other hand, in 2003 leasing had been more attractive than purchasing. “We are not under any obligation to grow,” says Peter Hauptvogel. However, the leased Fokker 100's are viewed internally as an outdated model and should probably be replaced by larger Boeing 737-700's that cost about the same to operate.
Air Berlin's new size has also led to a change of heart on the part of the company management towards the subject of trade unions, which for many years were treated with suspicion. Following the acquisition of two companies with union representation in dba and LTU, Air Berlin's flying personnel voted by 55 percent (equivalent to 39 percent of the total flying workforce) in favour of union representation. The pay and collective agreement with the Vereinigung Cockpit and Verdi unions which came into force on 1 August will cover all 805 pilots and 1,442 flight attendants. However, because the company is incorporated under British law, there is no employee representation on the supervisory board like at german companies.
From page 18 of FLUG REVUE 10/2007
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