The Air Berlin Case Study

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Masse advertisement: Air Berlin uses many masse media and sport (football) sponsorship to marketing its brand. In term of data, this constitutes an average of 4.93% of its sales against only 1.06% for Ryanair and 2.13% for Easyjet.

*Ryanair :

Its objective is to firmly establish it position as Europe’s leading low-fares scheduled passenger airline. To achieve this goal its strategy is based on two major points :

1. Operating point-to-point flights on short-haul routes to secondary and regional airports (which are generally less congested) in and around major population centers and travel destinations. This has major advantages:

- Allowing the company to offer direct, non-stop routes in cheap price;

- Offering higher rates of on-time departures, faster turnaround times, fewer terminal delays and more competitive airport access and handling costs. Its airports charges are the lowest: 13% of its sales on average against 26% for Easysjet and 25,33% for Air Berlin.

- Minimizing costs by eliminating the necessity to provide “frill” services otherwise expected by customers on long-distance flights.

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d. Minimizing the costs of assistance for connecting passengers, including baggage transfer and transit passenger. (lowest airport charges)

2. Raynair also stimulates demand by offering low fares, particularly from fare- conscious leisure and business travelers who might otherwise have used alternative forms of transportation or would not have traveled at all.

*Easyjet:

Easyjet’s vision is to become the best low fares airline in the world. To achieve this goal, its management believes in four strategic priorities:

- Safety as number 1 priority: Security is an all mans concern. Crew, engineering and ground staff and even shareholders are involved. They always monitor its average risk value through a composite risk value index with a boundary set at 0.8. That is reflected on its maintenance costs with an average of 7.9 % between 2005 and 2007 against 1,33% for Ryanair and 2.06% for Air Berlin.

- Building Europe’s number 1 air transport network by focusing on improving its routes, slots and bases to build its leading presence across Europe. Their passenger revenue reflects their leading presence: on average 2131 million per year against 1434 million for Raynair and 1365 million for Air berlin.

- Developing a winning customer proposition: Their advertisement cost is reflecting this reality. Almost 2% of their sales is spent for advertising the company.

- Growth with margins: EasyJet has focusing its strategy on low cost development to maximize its margins. Its management team continually focuses its efforts on all three drivers of margin: yield, ancillaries and cost with the objective of reaching a set percentage of return on equity in the medium term. Their margin is 5.66% of their revenue and their need to watch this if their goal is to challenge Raynair whose average margin on the period is almost 22%.

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3. Why did Air Berlin want to go public in 2006? Was it appropriate given their then current situation and the industry at that time?

An Initial Public Offering (IPO) is the first sale of stock by a company. Very often, it’s a solution for a company looking for additional growth to use an IPO as a means to generate the capital needed to expand the company. Although further expansion is profitable to the company, there are both advantages and disadvantages that arise when a company goes public. Why did Air Berlin want to go public in 2006?

Many reasons can explain why Air Berlin wanted to go public in 2006. In one hand Air Berlin was having a hard moment:

- - Although Air Berlin was enjoying strong brand recognition, its financial leverage ratio which provides an indication of its long term solvency was very bad. The extent to which the firm was using its debts was very high: 4.38 for total debt and 1.96 for long-term debts as computed in our exhibit # 2. Air Berlin's assets were mainly financed with debts. This confirms the risky position of the company especially because its interest rates were on the rise (see its net financing costs: 65,367 million).

- - Air Berlin was head over hears in debts with a debt ratio of 81.42% of its total assets. (See our exhibit # 2)

- - In addition, it has only 50 aircrafts in service to serve 17 countries, 135 routes and 74 destinations throughout Europe and part of North Africa.

- - Also, its cash flow from investing activities was negative (-102,852 million)

- - Still, Air Berlin was suffering a two- year deficit (-115.900 million in 2005 and -2,922 million in 2004).

- - Its current liabilities due to bank from assignment of future lease payments were more than double compared to the previous years going from 47,514 million in 2004 to 99,833million at the end of 2005.

- - Its projected long-term debts were stabilized at 381 million between 2005 and 2008 meaning its incapacity to pay off its debts before 2008.

- - Furthermore, it was also facing a competitive disadvantage in term of airfare. Its average fare was very high €86.00 compared to that of its close competitors respectively € 65.10 for Easyjet and €48.80 for Ryanair.

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In the other hand, the market was offering good possibilities of expansion:

- - The number of passengers flying on low-cost airlines was increasing. It was projected that passenger growth in low-cost segment would outpace that of charter and legacy carriers at 4% CAGR by 2010. Still, it was projected that low-cost carriers would carry 24% of passengers in Europe versus 16% in 2004. That is roughly 12% increase.

- - Industry observers were confident that the number of new plane would leave the low-cost segment exposed to overcapacity and increased competition on several routes.

- - In addition. Many of its competitors had placed orders for new aircraft to be delivered over the next few years.

- - The competition was so hard that Air Berlin intended