The Air Berlin Case Study

MBA 57609 - Financial Management

END TERM EXAMINATION

(SPRING 2011)

The Air Berlin Case

Prof. David Duffill [pic 1] 

CONTENTS

Contents 1 EXECUTIVE SUMMARY 2

Answer to question 1:

Description of the strategies used by the three airlines 4

Answer to question 2:

Peer financial and operational comparison of the three airlines 4

Note: Since questions 1 and 2 of the assessment are intimately linked, I’ll answer them at once. 4

Answer to question # 3:

Why did Air Berlin want to go public in 2006? 8

Answer to question # 4:

Estimation of the net present value of Air Berlin in 2005 and hence the share value 10

APPENDIX

Exhibit # 1-Peer comparison of strategies in tabular form. 13 Exhibit # 2 - Computation of data- financial ratios 14 Exhibit # 3 – NPV calculation 15

REFERENCES AND BIBLIOGRAPHY 16

[pic 2] [pic 3]

1

EXECUTIVE SUMMARY

Decision making and problem solving have always been part of a business manager’s daily tasks. Most careers in finance involve finding effective solutions to manage an organization's money in order to create wealth and increase the organization's value. This involves many majors like communicative skills, planning, raising funds, making wise investments, controlling costs and most importantly, making critical capital investment decisions. McLaney, E. & Atrill P. (2010: 526) stated: “If mistakes are made with decision, the effects on the businesses could be significant, if not catastrophic.”

Given the significance of investment decisions, it is crucial that there is proper screening of investment proposals using the most appropriate methods of evaluation.

In the Air Berlin IPO case, Chief Executive Officer (CEO) Jaochim Hunold was embarrassed with two decisions: “Should he delay Air Berlin’s initial public offering (IPO) or should he lower the price range of the IPO? In fact, although he had probably conducted some investment appraisals that led the executive management to decide to launch his company’s IPO, few days before the D-day, Air Berlin bid was receiving serious criticisms from the entire investment community. The detractors led by a Frankfurt based banker Jurgen Pieper perceived the shares as definitely priced too high, the risks too high and then the IPO too expensive. Analysts also pointed to other factors like the absence of profits for the last two years, the ascending price of fuel costs, the high capital expenditure and a low probability for the firm to register a positive cash flow before 2008. In addition to these pertinent remarks, shareholders themselves were not confident because of what they called “the lack of transparency and risks involved”. The vase was full so that CEO Joachim Hunold was uncertain what to do. He was facing a dilemma: delay the IPO or lower the price range of the IPO?

At this point, Air Berlin IPO appraisals are questionable in most points and very instructive for any smart entrepreneur or CEO nourishing a similar project.

• 1‐  What is Air Berlin strategy? Can this be compare to that of each of its two main competitors (Ryanair and Easyjet)? How this does affects the operations of the companies individually?  
• 2‐  While developing quantitative operational and financial comparisons between the three companies, what is the impact on data of various strategic elements identified?  
• 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?  
• 4‐  What was the net present value (NPV) of air Berlin in 2005 and hence its share value?  

[pic 4] [pic 5]

2

Our efforts in the next paragraphs will tend to find answers to these questions, which constitute our framework in this case analysis.

•••• •• •

[pic 6]

3

MAIN REPORT

Nowadays, any company goes with its own strategy. In some companies, commercial management is viewed as “the strategic hub of the business, helping to achieve and sustain profit by supporting and reconciling the competing priorities of the sales, technical, finance and legal functions”1. While in others, it is more narrowly focused and operates as “a pure sales/pricing function, providing assurances that services are being procured at a competitive rate and sold at a margin that will guarantee delivery of an organization’s financial objectives”. In order to find continuing success, managers need to understand both the life cycles and phases of growth of their businesses and the strategy of their competitors. This will help them to foresee upcoming challenges and chose their own strategy accordingly. This said, what peer comparison can we made of the strategies used by the three airliners Air Berlin, Ryanair and Easyjet?

Note: Since questions 1 and 2 of the assessment are intimately linked, I’ll answer them at once.

1. What is Air Berlin strategy? Can this be compare to that of each of its two main competitors (Ryanair and Easyjet)? How this does affects the operations of the companies individually?  
2. While developing quantitative operational and financial comparisons between the three companies, what is the impact on data of various strategic elements identified?  

A peer comparison of the strategies using by the three competitive airlines is shown in tabular in our exhibit # 1

The comments we can make regarding this comparison are as follow: * Air Berlin:

Air Berlin positioned itself as a brand-oriented hybrid carrier. Its goal is to fill the gap between the classic full-fare airlines and the low-cost carriers. That means in other words

1 From DAV Management Limited web site: http://www.davmgt.co.uk/default.asp?id=803&ver=1

offering their customers tickets at attractive prices whilst simultaneously providing them with outstanding service. Its strategy is based on four major points:

1. Alternating Hub-and- spoke service (structured route network with several hubs using major airports) and Point-to-point flights to and from secondary and regional airports. This has the advantage of targeting three major customer groups: business passengers, private individuals and organizers of package holidays. With this disposition, Air Berlin offers the interconnected route network with many major hubs (Palma de Mallorca, Nuremberg and London Stansted Airport.) to ensure short distances increasing thereby the flying convenience for passengers. Based on related data, it passengers number went crescendo by 41,89 % between 2005 and 2007.  
2. Diversification of its routes and fares: In term of data impacts, with this diversification of routes and fares, Air Berlin can be proud to have registered between 2005 and 2007, the highest revenue per pax among the three airlines. An average of 95 per year against 48.6 for Ryanair and 67.16 for easyjet.  

1. Routes: 135 routes deserving 74 destinations in 17 countries throughout Europe and part of North Africa. 200 flights per week connecting 18 German airports and 11 mainland Spanish airports.  
2. Fares: distinction between standard one-way prices: €29 within Germany and €49 to Palma de Mallorca and the Spain mainland.  

1. Concentration on its key competitive strength: Palma de Mallorca constitutes 25% of its traffic. A particular attention is given to this destination to conserve and improve its domination. This concentration gives limited overlap in direct competition with its larger rivals Ryanair and easyjet.  
2. Use of ancillary services such as car rentals or hotel bookings to increase its sales. In 2005, 2006 and 2007 respectively 2.78%, 3.95% and 4.61% of air Berlin’s sales came from ancillary services.  
3. Cooperation: with a fleet of only 56 aircrafts (average age 5.6 years), Air Berlin by this means expands its route network when the opportunity arise using code- sharing partnerships to appeal to the entire relevant target from price-conscious passenger groups via families all the way long to pleasure travelers.  

Mixed fleet operated: Air Berlin intents to transform each of its airports in Germany into either solely Boeing operated airports or solely Airbus –operated airports to provide additional economic benefits on fuel cost.

Multiplication of its distribution channels to increase its sales: by combining multiplication of distribution channels (website, company’s service centre, ticket counters and travel agencies, tour operators and al.) and masse advertisement, Air Berlin has increased its revenue of about 42.7% passing from 1220 million in 2005 to 1741 million in 2007.