In just 12 months Joachim Hunold, the chief executive of Air Berlin, has taken the German low-cost/charter hybrid carrier public, bought a rival and entered the long-haul market
You won't find Joachim Hunold dressing up in funny outfits in a public relations stunt for his airline as easyJet's Andrew Harrison and Ryanair's Michael O'Leary have been known to do. It's not his style. With his highly polished expensive shoes, tailored suit and sharp manner, Hunold is every bit the perfect German businessman.
Style comparisons aside, however, Hunold is just like his peers at Europe's big two low-cost players in being unafraid to bring out the cheque book when he feels the time is right. Rival easyJet bought Go in 2002 and Ryanair bought Buzz a year later. Hunold's first move was in 2004 when he took a 24% stake in Niki, the Austrian low-fare airline established by the ex-Formula One racing driver Niki Lauda.
His second, more significant step was to buy "dream partner" Munich-based dba from investment group Intro in August last year. Buying a carrier with a strong German domestic network and slots at busy Munich and Düsseldorf airports was seen as sensible.
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As this deal proves, Hunold and Air Berlin are unafraid to be different. His airline doesn't fit the low-cost carrier mould nor conform to the charter code. "We never wanted to be a low-frills carrier and never wanted to be like a flag carrier. I think where we position ourselves is as a hybrid in between," says Hunold.
But Air Berlin's roots are in the leisure market. The airline was founded by former Pan Am pilot Kim Lundgren as a US company in the late 1970s, beginning services from Berlin to the Spanish holiday island of Majorca with a leased Boeing 707 in 1979.
The island's Palma airport remains the prime destination in its route network, with the Majorca Shuttle operating daily flights from 12 German airports. This summer it will have more than 360 weekly flights to Palma. Air Berlin also uses the airport as a mini-hub to transfer travellers from northern European destinations to cities across Spain.
Ownership changes
Lundgren was obliged to find German partners when the Berlin Wall fell in 1989 and ownership rules changed. In 1991 a group of German businessmen teamed to back Air Berlin. Hunold, who took a 9% stake, was tempted from LTU to run the airline.
Like most of its leisure cousins across Europe, Air Berlin ran a tight operation. "Air Berlin has always been a low-cost carrier, although we were only flying for the tour operators," says Hunold. "But I had my own marketing and we operated from small regional airports." Air Berlin says it was the first holiday airline to operate from "fringe airports" in Germany, like Münster/Osnabrück and Nuremberg, to provide "blanket coverage" to be closer to its passengers.
In 1997-8 Hunold began developing the Air Berlin brand with direct sales through its website and call centres, in addition to commission-based sales via travel agents. "We were the first in the German market with this approach," he says. Four years later Hunold expanded the concept to add Europe's major cities to the holiday destinations. City Shuttle, later renamed Euro Shuttle, was born in 2002.
The idea for a flotation was mooted to raise the money to expand. "In '97-98 I was convinced that for the long run I had to raise capital so the idea of an IPO was already there at that time or to get a strategic partner," says Hunold. "In the beginning we talked with anybody. I think 10 years ago we'd already had talks with Thomas Cook, and I talked with Lufthansa for a time about being a low-cost carrier for them."
Although none of the discussions went any further, Hunold knew time was short as other German and the UK low-cost players were expanding rapidly. "My intention was if I was going into the market I had to go very quickly. In 2003 I increased my fleet by eight aircraft, which was a tremendous step. It was important to go into the market to take my position there."
By the end of 2005 Air Berlin was a serious European player with annual revenues of $1.5 billion, carrying 13.5 million passengers on a fleet of some 50 narrowbodies. But the airline needed a major cash infusion to keep growing at its annual double-digit lick. "By the end of 2005 we had built up a strong network, but our equity position was too weak to go on so the decision with the shareholders was either to do an IPO or to find a strategic partner," says Hunold.
The IPO turned out as the favoured option. As the flotation process picked up, the previously unknown financial status of Air Berlin was revealed for the first time. On the face of it the books were not a pretty picture, showing an operating loss for three years from 2003 and a net loss of $143 million in 2005.
Hunold is at pains to point out that the numbers are misleading and that the carrier is and has been profitable. "We made profits right from the beginning because otherwise we couldn't have purchased aircraft because we wouldn't have the equity for the financing. Myself and my colleagues took every year only a small portion of money from the company and left the rest for buying new aircraft."
As a private company the aircraft were owned in clever ways to maximise tax advantages for the shareholders. This distorts the profit and loss figures at the net level, making it "difficult" to see the true picture. "But on the operational side we were always at the right level, we were always profitable," says Hunold.
It was a message understood by investors and financial analysts, he says, with many seeing great potential in a business that had grown to become Europe's third major low-fares player after Ryanair and easyJet. But there was a twist in store. Even as it took to the road to sell the IPO, fuel prices shot up and airline stocks around Europe tumbled. Air Berlin was forced to delay the flotation and revise the price downwards.
Despite this setback, Hunold is pleased the market remained confident in Air Berlin's business plan. "Two hours after we made the new price the books were full," he says of an offer that raised €350 million ($475 million) for the airline and puts 72% of the company in public hands.
Acquisition target
The money was for working capital and to put Air Berlin in a position to buy a rival if the opportunity arose. The speed of that opportunity took all by surprise as Intro sought to offload its loss-making airline dba. This carrier, owned by British Airways in the late 1990s and up until 2003, had always struggled to turn a profit, with operating losses totalling over €100 million in the last three years, despite revenues rising to €404 million in its financial year to 31 March 2006.
However, for a net price of €70 million, dba secured Air Berlin's position as Germany's largest low-cost carrier with virtually no network overlap, gave access to slots at congested airports and an attractive deal for 25 Boeing 737s from 2008. Dba has been brought under Air Berlin's marketing umbrella. "Due to our distribution power we increased dba's bookings via our website instantly by 200 passengers a day," says Hunold.
The dba deal is just one of several consolidation moves involving German operators over the past 12 months. Earlier this year, LTU came into the frame with owner Intro saying it was seeking new finance and partners. Air Berlin was not seen as the most likely suitor, but Hunold said in February, one month before the deal with LTU was forged, that he was ready: "With the dba integration we are now in a very strong position in the market and we will look carefully at what others do and will take our chances."
Hunold acted swiftly to bag loss-making LTU in a move that surprised analysts, but which he says is something the market wanted. "Many of our customers, who especially appreciate our good service offering, have been asking us for many years to start offering long-haul flights," he says. "This is now possible for us, as we have the necessary feeder network through our European and domestic German connections." As with the dba deal, buying LTU gives Air Berlin more slots at congested Düsseldorf. Air Berlin took control of LTU for €140 million in cash and is assuming €190-200 million of debt. The deal is being financed mainly through an equity issue and from convertible bonds totalling €250 million.
On the face of it Air Berlin's LTU move is yet another example of carriers drifting away from the established low-cost model. But Hunold is comfortable with having a strong component of charter business, which is part of the airline's history and its future, in its portfolio. In 2006 it revenues from charter flying increased by nearly 19% to €590 million out of total revenues of €1.57 billion. "I'm developing my business, so why should I give it up if it counts?" he asks.
He watches his competitors closely, but is steering Air Berlin on its own unique path. "I am never aiming to be big or not big, it must be profitable and it must make sense. So we are looking into different markets and we have a totally different strategy."
Profit promises
After the recent release of its 2006 figures Air Berlin can say it has made significant progress on the profits front. It delivered a net profit of €50.1 million in 2006, a huge turnaround compared with a loss of €115.9 million the year before. This gives a modest 3.1% margin at the net level, while it had a 4% operating margin.
Hunold says that it was important for Air Berlin to deliver on its promises in 2006, and that's what it has done. It is, he says, too strong to call the result a turnaround. "It's not because we are coming to profitability after investing in our network for three years. In 2005 I had to invest in growth." However, Air Berlin has taken the axe to some of its cost base, bringing in credit card fees, reducing travel agency commission to zero, lowering catering and airport costs.
For Hunold this promises to be a challenging year. The integration of dba is well advanced and the job of bringing LTU into the fold is beginning. Investors will want to see this achieved as smoothly as possible while at the same time improving its margins.
The buying and selling will continue, but Air Berlin probably has enough to digest for now. "I think there might be more consolidation, not only in Germany, but also in Europe. There are a lot of low-cost carriers and you don't know how long they will last and some flag carriers are in a very weak position. Look for example to Austria or Italy."
With its acquisitions on board, the Air Berlin group has swelled rapidly to one that now carries over 22 million passengers, has a fleet of nearly 120 aircraft and a turnover of about €2.4 billion. Hunold has a twinkle in his eye and you can see why. This German is enjoying life piloting such a major European airline force.
Before the LTU acquisition, he would have been happy with at least 10-13% growth in revenue for the next three years. But if opportunities like LTU come along then Air Berlin is ready to take them. "If you had asked me one year ago, when we did the IPO, is dba a target for you, I would have said no, but suddenly it came on the market. This business is much too flexible and changes too fast year-by-year, season-by-season, so you never can say never."
Hunold's message to Boeing
Just like his peers in the new wave of carriers that have muscled into Europe's deregulated market over the past decade, Joachim Hunold is refreshingly open and direct. For example, there is the saga over this loyal Boeing customer ditching the US manufacturer for Airbus in 2005.
Boeing never believed Air Berlin would defect. But Hunold wanted the same discounts as easyJet and Ryanair had obtained. Boeing would not budge.
A visit to Toulouse with Niki Lauda, the ex-Formula One driver and founder of Niki, in which Air Berlin has a 24% stake, saw them walk out with some great prices for a big A319 order. "Then they [Boeing] took out a sheet of paper with the right price I wanted to have before, I said now you are too late. Not with me, you cheated me."
This was the catalyst that helped transform Boeing's entire sales strategy and sales team, which was revamped by Scott Carson, who now leads Boeing.
Hunold was even invited by then Boeing boss Alan Mulally to address top executives in Seattle. "I said you are too arrogant, you are not looking to the market." To its credit Boeing listened and changed. Its reward from Air Berlin in November was an order for 60 737s.
Leisure roots
Joachim Hunold has come a long way since he was offered the chance to help run Air Berlin back in the early 1990s. At that time he was effectively the number two at LTU, the German leisure carrier that he would eventually end up buying 16 years later. At LTU, Hunold was the head of operations, which helps explain the slick operational set-up at Air Berlin.
Hunold, 58, has a reputation for fairness and frankness, and does not suffer fools gladly. He is use to making his own way, delivering laundry on his bicycle to pay for ice hockey equipment in his youth and running a bar to finance his studies in his hometown of Dusseldorf as well as his flying lessons. After failing his law exams he worked for the city's airport and then moved into the leisure industry and later LTU.
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Source: Airline Business
