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Etihad extends life line to Air Berlin after Alitalia bankruptcy

ABU Dhabi-based Etihad has agreed to provide Air Berlin with financial support for at least another 18 months, including EUR350 million (US$382 million), according to the German airline's annual report, published after the Persian Gulf carrier let Alitalia slide into bankruptcy after workers spurned a restructuring plan.

That extra injection takes Etihad's total exposure to Air Berlin close to EUR2 billion and suggests the Mideast company is not yet ready to abandon a partner which sits at the heart of a so-called Equity Alliance strategy that saw it build up minority holdings in carriers spanning Ireland to Australia.

The fresh funding, combined with Etihad's assertion that "what has happened at Alitalia does not affect how we view any of our other equity investments", represent some show of faith in Air Berlin, which has racked up net losses of EUR2.7 billion in little over six years and has net debt of EUR1.2 billion.

"It's imperative that Etihad defines a clear road map," said aviation specialist Mark Martin, who heads the Dubai-based Martin Consultancy. "The time has come for Etihad to face tough decisions, either to stop the financial bleed or stay invested with a clear return-on-investment ultimatum. That means deciding which assets have value and which are simply 'deadweight'".

The question of whether to carry on funding its partners, most of which are profitable, was already under a review at Etihad and has become more pressing with Mideast demand stuttering as the lower price of crude clips bookings from the oil and gas industry and weighs on the wider economy.

On the face of it the situation at Air Berlin - in which Etihad has a 29 per cent stake - appears dire, with CFO Dimitri Courtelis resorting to using an April 28 analyst call to reassure passengers that the company remained liquid and wasn't about to cease flying.

At the same time, CEO Thomas Winkelmann said that there are "fundamental differences" between Air Berlin and Alitalia, with management, labour unions and investors all generally "pulling in the same direction." At the Italian company, workers recently voted against job cuts tied to a 2 billion-bailout plan, leading to the bankruptcy filing.

Air Berlin still has its strategic attractions, continuing to provide access to a German market which Gulf carriers have found tough to penetrate due to strict bilateral agreements, while its assets have already proved saleable.

As Air Berlin's losses mounted last year, Etihad brokered a deal to lease 38 of the unit's aircraft plus crews to Deutsche Lufthansa AG, where CEO Carsten Spohr has said he'd be interested in taking on more of the business on the right terms and if permitted to do so by antitrust authorities.

In a parallel deal, Air Berlin will also move about 20 jets to a leisure business to be formed between TUI AG and Etihad. That leaves the airline - which once touted itself as "hybrid" operator spanning business, low-cost and tourist flights - with only about 75 aircraft, or about half the former fleet, and will be much more focused, according to Mr Winkelmann, a former Lufthansa executive, Bloomberg reported.

"The old Air Berlin was an airline that attempted to do everything, that sought to be a jack-of-all-trades," the CEO said. "That is clearly not possible."