Speech for the AGM Air Berlin PLC (6 th June 2013) Wolfgang Prock-Schauer The spoken word shall prevail. 1
I d like to wish you all a warm welcome to our AGM. Before I start to talk about the past year and the current position of airberlin, I would especially like to welcome Austin Reid, who joined our Board of Directors in January 2013 and brings with him many years of experience and expertise in the airline industry. Today I am reporting on a year during part of which I was on the airberlin Management Board, under the leadership of Hartmut Mehdorn, with responsibility for strategy and network. As you know, I joined the airberlin Management Team on 1 st October 2012 and took over the role of CEO at the start of 2013. I would like to take this opportunity of thanking Hartmut Mehdorn for his dedication and leadership in guiding airberlin through a very challenging time. Ladies and Gentlemen, Let s first of all take a look at what airberlin has achieved over the past year: we are clearly the No. 2 carrier in our core market of Germany, Austria and Switzerland, which is the largest travel market, situated at the centre of the European continent and with over 33 million passengers we are ranked seventh in Europe an extremely strong European airline with a wide customer base. We finished the financial year in the black and achieved a net profit for the first time in five years. Of course, one-off effects have contributed to this result, such as the sale of shares in our frequent flyer program, topbonus. But this achievement has also come about as a result of our own efforts, in particular our Shape & Size efficiency programme, which has contributed more than we expected to our positive end of year result, with improved earnings of over 250 million euros. The increasing synergy effects achieved through our partnership with Etihad Airways have also contributed to this positive result. Following its start in January 2012, the benefits of our strategic partnership with Etihad Airways became apparent in the results during the course of the year, enabling us to reap even more benefit in 2013. 2
Despite this positive annual result, we are well aware that we still have a long way to go to get airberlin back onto solid economic ground and make it sustainably competitive in the future. During 2012 we faced some challenges. With regard to costs, we have to acknowledge that the rise in fuel costs and the burden of the air passenger departure tax in particular have led to considerable cost increases. Oil prices have once again shown great volatility and increased substantially. Air passenger departure tax cost us nearly 155 million Euros over the year under review. These are costs which we cannot pass on to our passengers. A clear change of course is needed here. I am pleased that the petition for the abolition of air passenger departure tax has been signed by more than 100,000 people and that the entire team at airberlin made a considerable contribution to this with their commitment. I would like to thank our employees for the great effort they have made in this context. The petition is a joint step taken by the German aviation industry, airlines, airports, trade unions and various works councils in the sector under the leadership of the BDL. The petitions committee will now assess the arguments and potentially make a recommendation to the German government. I hope that this will not only send a clear message in political terms, but also lead to an actual rethink and the abolition of this tax to provide a fair regional economic policy for the aviation sector, which is so important, and the numerous people working in the industry in this country. Let s have another look at the figures for 2012: While we reduced the capacity offered by 7.4% in comparison to the previous year to 41.8 million seats by suspending unprofitable routes, the number of passengers only fell by 5.5% to 33.35 million. Utilisation thus increased by 1.6% to a seat occupancy rate of 79.8%. This was a great success especially since we did not achieve this increase at a cost, as can be seen from our yield development. We were able to increase our yield substantially by 7.7% to 120.1 euros, while the turnover per available seat kilometre improved by 5%. 3
We reduced our fleet by 15 aircraft to a total of 155 at the end of the year and thus also improved our flight schedule. As regards the cost positions excluding fuel, we report a drop in direct operative costs in line with the reduction in capacity. Since external costs also rose here, these costs, such as airport charges and fees for air traffic control, did not fall to the same extent as the number of flights. However, the positive trend is still clear here. We increased the turnover per available seat kilometre by 5%, whereas the costs excluding fuel rose by 1.3%. We are therefore on the right track. We were able to slightly increase our turnover last year, as already reported, to 4.31 billion despite significantly reduced flight capacity. EBITDAR, that is earnings before interest, taxes, depreciation and amortization, saw an improvement of 73% from 425.9 million Euros in the previous year to 736.4 million Euros. EBIT (earnings before interest and taxes) rose by 128% from -247 million Euros in 2011 to70.2 million euros last year. Ultimately, a profit of 6.8 million Euros was recorded, compared to -420.4 million Euros the previous year. Net debt fell slightly at the end of the year to 770 million Euros, compared to 813 million Euros on 31 st December 2011. 2012 was not a good year for our shares. At a year-end price of 1.54 Euros, airberlin shares were listed at 38.4% lower than the year-end price of the previous year (2.5 Euros). A change of trend in the share price was only seen at the end of the year following the announcement of the Turbine turnaround programme. A successful start to 2013 was seen with a substantial price increase for airberlin shares. This confidence is justified. Through our Turbine programme we will ensure sustained profitability for airberlin in the future. We will explain later how far we have got with this programme. 4
Ladies and Gentlemen, We intend to reposition airberlin. airberlin has a business model, which will be further improved by Turbine, enabling the airline to further develop its areas of strength. The aviation market is changing substantially. Business models which were previously distinct are moving closer together. Premium service providers are adopting ideas from the low cost carriers and vice versa. airberlin is a full-service carrier offering a recognised attractive priceperformance ratio for both business travellers and tourists alike. We are managing our business processes and business segments in an integrated way to make them more efficient. To this end we are developing a lean, homogenous organisation by means of cost reductions, consolidation, the realisation of group synergies in procurement, facilities, training, etc. As regards the market we are reinforcing our strengths and focussing on profitable routes: 1. on short- and medium-haul routes in the DACH region, where 80% of our passengers are located, 2. on long-haul routes to our main destinations in the USA from our hubs in Dusseldorf and Berlin, 3. on our leading position in the market for flights to Mallorca and 4. on our global network through our strategic partnership with Etihad Airways and our membership of oneworld. This model allows us to balance the daily, weekly and seasonal fluctuations of our business as far as possible and exploit our aircraft to the full so that in summer we are in the air for an average of 11.5 hours per day, one of the best performances in European terms. I would like to go into more detail regarding our new partnerships, since they represent an integral part of our business. The first year of our collaboration with our largest single shareholder, Etihad Airways, has been very successful. The cooperation with our strategic partner has seen an impressive development, whereby viable cooperation has quickly led to dynamic 5
developments. It is clear that this collaboration has been well accepted on the market. Last year we already had more than 320,000 passengers on codeshare flights. This is more than we predicted. And this development is continuing to make headway as we saw in the first quarter of 2013: in the first three months of the current year we achieved almost 50% of the previous year s result. At the end of May, with the bookings we have already for the entire year, we expect to meet the level of last year. The strategic partnership with Etihad Airways brought in a total joint turnover of 100 million euros in 2012, and our joint portfolio is constantly developing. Etihad Airways and airberlin currently have about 100 codeshare routes. Two thirds of these are airberlin routes within Europe and to North America. 32 routes are operated by Etihad Airways, offering flights via the hub in Abu Dhabi to destinations in the Middle East, Asia, Australia and Africa. It is our aim to further develop this joint route network. New destinations in China and Japan have already been added. Vietnam will follow. Collaboration with Etihad Airways partner Jet Airways and the development of the codeshare network to India will be a further milestone. At present there are still restrictions on traffic rights in this area. We already have a codeshare agreement with Air Seychelles which gives our passengers access to flights via Abu Dhabi to the Seychelles. Codeshare agreements with Etihad partners Virgin Australia and JAT are also on the agenda for 2013. For us, Etihad Airways is more than just a shareholder and codeshare partner, however; it is our number one partner in many other areas. In addition to the development of our route network, our close cooperation enables us to engage in a range of joint projects and to exploit synergies. We work together in the area of sales, operations, product, procurement and finance. Our partnership with the oneworld airlines, which is focussed on codeshares, is developing just as well as the one with Etihad Airways, although it is less dynamic and comprehensive in scope. In terms of passenger numbers, we have achieved a similar order of magnitude in 2012: 300,000 joint passengers. After the first quarter of 2013, this is also well above the figures for the previous year: in the first few months of the year we have already welcomed more than 6
100,000 oneworld passengers the number of passengers during this period has therefore doubled compared to the previous year. We are therefore expecting a very positive development for this year overall. Within oneworld we are working closely with several companies. This means that all our important destinations in the USA are American Airlines hubs. From these our passengers have more than 60 connecting destinations in North America available to them. airberlin has 14 codeshare partners in total: in addition to Etihad Airways Equity Alliance and oneworld partners, there are five further codeshare partners who do not belong to any alliance. In addition to our alliances, optimisation of the network is also a major factor contributing to the fact that our turnover reduced by only 3% in this year s first quarter, despite a capacity reduction of 11%. This has enabled us to achieve a significantly better yield, and to further improve capacity utilisation. In the previous quarter, EBIT stood at minus 188 million Euros, after minus 149 million Euros in the previous year. The first quarter 2013 is burdened with launching costs. In particular, for instance, we have not been able to fully adapt resources to the changed production volume. This applies to personnel as well as to the fleet, which created higher technical expenditure due to redeliveries, amongst other reasons. Added to this are the effects of strikes by safety personnel at the German airports of Dusseldorf and Hamburg. Compared to the end of 2012, shareholder's equity declined as a result of the usual seasonally weak results and the one-off charges resulting from the Turbine turnaround programme and other one-off charges. As of March 31, 2013, shareholder's equity amounted to a deficit of 53.1 million Euros. The measurement of the shareholder's equity as of the reporting date according to IFRS reporting represents a momentary snapshot as of the end of the first quarter. It has no effect on the operations of the airberlin group. In the two subsequent quarters, the typical seasonal pick-up in business will occur again. On-going operations, the further implementation of Turbine, and any necessary investments are sufficiently secured through the high levels of cash available amounting to 470 million Euros at the end of the reporting quarter. Our aim continues to be to achieve an equity ratio of 15-20% in the medium term. 7
As regards the most important indicators in the first quarter: it is clear that we are repositioning airberlin. By suspending unprofitable routes we have reduced seat capacity by over 1 million seats. This corresponds to a significant reduction in available seat kilometres of 11%. The reduction in passenger numbers of 9% has fallen significantly less than the reduction in capacity. This means that we have been able to increase capacity utilisation by 3.3 percentage points to an historic high. In fact, at 85.6% we have achieved the highest capacity utilisation in any one quarter since going public. The yield has also continued to show positive development. We have recorded an increase of 6% in this area. The number of flights has dropped by 14%. Apart from the external factors which affect all of us in the industry, we must first and foremost examine ourselves. Firstly we must first acknowledge: we were not sufficiently market-orientated in all areas in this new and even tougher competitive situation. And we have no time to lose. We must act now to rebuild the company in such a way that we achieve sustainable earnings with our core business and can finance ourselves from our own resources. This is achievable! We have the potential to do it, and we have set up the Turbine turnaround programme and launched its implementation. Turbine goes further than all previous programmes and affects all departments in the company. We will become LEAN, i.e. we will organise our internal structure as simply and cost-efficiently as possible. Simultaneously with the SMART measures we will focus on our guests and our brand s core. We are applying four levers to make us Lean & Smart: 1. Improvement of our network, reduction and harmonization of our fleet. 2. Restructuring of sales and marketing. 3. Optimization of our on-board product. 4. Checking all our air and ground processes. The second strand in the Turbine programme is marked by intensive negotiations with all stakeholders: with our internal partners in the company 8
and our external business partners. We have already brought many of these negotiations to a successful conclusion. Overall, we are predicting that Turbine s contribution to the result will amount to 400 million Euros by the end of 2014. 200 million Euros will be achieved in 2013, and 200 million Euros in the following year. Half of the overall amount of 400 million Euros is to be achieved through internal improvements (i.e. Lean & Smart) on the one hand, and through negotiations with stakeholders such as airports, leasing companies, catering service providers and staff representatives on the other hand. By implementing the turnaround programme we are on the right track. Two thirds of the planned contribution by Turbine to results for 2013 (200 million Euros) are already assured. We have already made good progress with the internal measures. We have streamlined our organisation and introduced new processes. In the Operations division we have centralised all ground services, in the area of flight services we are putting new, streamlined processes in place. In revenue management, Leisure and Scheduled Services have been brought together and integrated. We are also bringing together the customer service departments, and are no longer making a distinction between whether customers approach us before or after the flight. This means that we can guarantee uniform quality of service and quick reaction times. Outsourcing is also under consideration in this respect. In implementing staffing measures, we are also on schedule. As part of the Turbine programme we are planning a reduction of 900 full-time jobs in total. In the first 5 months to the end of May we have already shed 250 jobs. This includes making cuts in management positions, and implementing salary cuts. In the cabin services area, we reached an agreement in May which guarantees more flexibility. We are also in advanced discussions and negotiations with representatives of other groups of employees. Sales are concentrating on a focussed distribution strategy with a strong emphasis on turnover quality. This means that we do not sell tickets at any price. The figures presented above also testify to this. New Sales Intelligence 9
Systems are enabling us to control sales better. The current summer flight schedule already takes into account the result of the optimised network: we fly fewer routes, but the important established routes at a higher frequency density. At airports we are implementing new boarding processes and are entering into new binding Service Level Agreements. Quality checks also ensure that we, and particularly our passengers, are receiving the services for which we are paying. We have achieved very good results and significant contributions with the leasing companies; the same applies to many airports and other system partners. As regards the new BER airport, it is very important to us that a fully functioning infrastructure is in place and that the building work continues in accordance with a solid plan and a reliable opening date. Flight operations at Tegel entail especially for us and our flight guests considerable burdens and restrictions under conditions that have become a lot more difficult. Even the necessary investments and improvements to ongoing operations will not be able to change much in this regard. The postponement last year did us harm and continues to do us harm. As already mentioned the positive effects of the Turbine programme will reveal themselves cumulatively from the third quarter onwards. For the second quarter we are still expecting further expenses due to start-up costs. This is on target: we will achieve the contribution to earnings amounting to 200 million Euros planned for 2013! Two thirds of this is already assured. By the end of next year we intend to have achieved the overall contribution to earnings of 400 million Euros. 10
Ladies and Gentlemen, Let me give you a summary of the outlook for the current year. We will continue consistently to pursue the course we have set. For our operating performance this means: in long-haul we are expanding capacity, whilst implementing the reductions which are already known about in short- and medium-haul flights. The strong rise in capacity utilisation has already been demonstrated in the first few months of the year. Through focussing better, as well as through improved sales strategies, we will see this rise continue over the whole year. That is why we are predicting a modest increase in turnover, despite capacity reductions. Our cost positions will improve over the course of the year. We will be able to adjust certain costs only as the year progresses. Increased production over the strong summer months does of course ensure a positive development of unit costs in the 2 nd and 3 rd quarters. This situation will be further improved from the third quarter onwards due to the effects of the Turbine programme, which will start to be felt. We are therefore sticking to our outlook and further assume that the current year will end with a balanced result on an EBIT-level. The successful placement of a convertible bond and good incoming bookings have improved our liquidity at the end of the first quarter we have around 470 million Euros of available cash. By the end of 2013 we will again have positive capital resources. The aim in the medium-term remains an equity ratio of 15-20%. Out main target for 2013 continues to be debt reduction. We are very confident of achieving the target of 500 million Euros net indebtedness by the end of 2013. Ladies and Gentlemen, The year is going to plan. I am convinced we are on the right track! We will achieve our goals! Thank you for listening. 11