Speech by Mr. Joachim Hunold, CEO Air Berlin, on the occasion of Air Berlin s Annual General Meeting on 10 June 2009 in London Check against delivery Ladies and Gentlemen, I am pleased to welcome you at our Annual General Meeting. For Air Berlin, 2009 is by no means a year like any other. Although our company has only been publicly traded for three years, we can proudly look back on a 30-year history. Our founding father, Kim Lundgren, established the company back in 1979 with two aircraft, in the middle of an oil crisis. In the meantime, Air Berlin with its 131 aircraft has become a key player in European air transportation. On the occasion of our anniversary on 28 April 2009, the German Federal Chancellor, Angela Merkel, rightfully called our company's rise a success story. Over the past decades, the secret of our success lay particularly in achieving the greatest result possible, using the means at our disposal. If truth be told, we did not really have a choice, since Air Berlin was never part of the European airline companies that were formerly state-owned and that, at the time of their privatisation, and at the tax payers' expense, were endowed with hundreds of airplanes. Under constant pressure from our competitors, we had to calculate carefully from the very beginning. This strategy helped us to overcome any crises to which our branch fell prey. For the very same reason, we are currently not joining ranks with those who have made whining their main purpose in life. When we came together here, last year, a storm was already brewing on the airline industry horizon: The global financial crisis and the ensuing economic weakening were already lurking around the corner. However, at the time, the number one topic in the sector was the dramatic development of the kerosene price which had doubled within only twelve months.
Meanwhile, the financial crisis has grown into a global economic crisis. The airline industry has not been spared. Even the economically most viable companies have incurred horrendous losses over the first quarter of 2009. Almost all the airline companies have been and are still being confronted with a decline in the number of passengers. A few companies increased their number of passengers by using dumping prices, leading to high losses. As always, Air Berlin went its own way. Our company was the first larger European airline company that had already changed course in the early summer of 2008, targeting capacity adjustments and performance improvement. At the time, not all the analysts and journalists grasped this change of gear. One of the cuts we had to introduce involved terminating our flight connections to China, which had only been established on 1 May 2008. In the summer of 2007, when we had just started planning our flight routes to Beijing and Shanghai, the world was still a brighter place. China was considered the market of the future. The Olympic Games were just around the corner, promising a large number of passengers. Even the price of kerosene was of no concern yet. Then came the Tibet crisis, causing major industrialized nations to put their political and economic relations with China on hold. The Chinese authorities retorted by tightening the visa requirements. This resulted, among other things, to half of the hotel rooms in Beijing remaining vacant during the Olympic Games. On top of that, our overflight permissions for Russia were only being renewed on a monthly basis, and on condition of our paying substantial fees, despite having been previously agreed otherwise. Under these circumstances, we concluded that it was better to make a painful break than to prolong the agony. The ease with which we were able to rebook the passengers who had already bought tickets with our company, on competing airlines and at very advantageous prices, proved that we had made the right decision. It goes without saying that our competitors' aircraft had plenty of room to accommodate our passengers. Nevertheless, our China venture came at a price of EUR 32 million. The question as to whether we will re-enter the long-haul business flight sector with renewed strength will depend on market developments. In any event, the China crisis marked the onset of the decline in international business travel, especially in the previously highly profitable Business Class and First Class segments. Under these circumstances, entering a new competitive field seemed unwise at the time. -2-
In this context, we also had to reassess the planned acquisition of Condor with its traditional strength in long-haul business. When, on top of that, the German Federal Cartel Office imposed conditions which would not have been economically viable, we pulled the plug and withdrew from the project. From Air Berlin's point of view, China, Condor and kerosene were the three low points of the year 2008. All three affected the balance sheet. Whereas China and Condor are history and do not have any economic repercussions on the current business year, the same does not apply entirely to the kerosene price. I will address this topic later in my speech. At the last Annual General Meeting, I promised to implement an extensive array of measures. Please allow me to quote myself: "We are reducing flight frequencies to destinations for which there is less demand, selectively suspending unprofitable connections, and focusing on our presence in the core markets. As far as the market permits, we aim to pass on cost increases by raising prices and adjusting fees. We are also pursuing a consistent strategy of lowering the cost of external materials. This includes reducing fuel consumption through the use of fuel-efficient airplanes, lowering terminal charges and reducing catering costs." Today, I can proudly announce: "We have delivered!" We have done what we promised to do, step by step. I do not want to bore you with the figures which you already have in front of you. I would just like to draw your attention to a couple of key figures from the previous business year, which prove that we have attained the goals we had set for ourselves: In 2008, despite the extremely challenging business environment, we increased the number of passengers by 1.2 percent to 28.6 million, whereas the airline sector, as a whole, saw the number of passengers drop by 2.7 percent. Air Berlin's revenue increased by 6.7 percent to EUR 3.4 billion and the load factor improved by 1.1 percent to 78.4 percent. We are especially proud of the fact that we were able to increase revenue per available seat kilometre by 12 percent, namely from 5.37 to 6.02 Eurocents. This result stems from an improved price control and a higher-quality client mix. The latter is primarily due to the increased number of corporate agreements. The growing price consciousness among business and corporate clients has resulted in increased demand for Air Berlin flights. EBITDAR (Earnings before interest, leasing expenses, depreciation, amortization, interest and taxes) improved by 11.6 percent to EUR 477 million. EBIT (Earnings before interest and taxes) improved by EUR 35.7 million and reached EUR 14.2 million. -3-
We are and remain the European airline company that features the best priceperformance ratio. Two opposing influencing factors left their mark on Air Berlin's 2008 earnings development. On the one hand, our "Jump" performance improvement program led to a noticeable increase in earnings. On the other hand, this was countered by a significant weakening of the financial results. This weakening was mainly due to high non-cash interest expenses resulting from the critical distortions in the international financial markets, and a tax burden of EUR 15 million linked to the dissolution of dba. Therefore, consolidated profit decreased from minus EUR 39.9 million to minus EUR 75 million. We would also have incurred losses at the operational level, had we not decisively prevented this from happening by hedging our fuel cost exposure at the right time. In the course of 2008, the price of kerosene peaked at USD 1,400 per ton. If we had been forced to pay market prices, we would have incurred additional expenses amounting to EUR 326 million for the year. Hedging allowed us to limit the extra expenses to EUR 145 million. We were able to offset the extra expenses by means of general price increases and by raising the fuel surcharge. Since our hedging activities are carried out on a continuous basis, the existing hedging agreements will continue to have an effect on the first six months of 2009, even though the market price for kerosene has fallen below the 2007 level in the meantime. However, the current surge in commodity prices proves once again that hedging is and remains an essential tool. In the first quarter of 2009, Air Berlin proved that its business model remains well positioned. Although the typical seasonal operating loss climbed from minus EUR 68.8 million in the first quarter of the previous year to EUR 87.3 million, in part due to the Easter flight season falling in April rather than in the first quarter, we achieved relatively speaking one of the best results in the airline sector. Our prompt reaction to the negative economic environment has given us a head start that will bear fruit over the further course of the year. I can already say now that, despite the general decline in the number of passengers and a slightly lower load factor, we are striving to achieve a better operating result for the entire year of 2009 than that of 2008. One of the parameters pointing in this direction is the 12.6 percent increase in the revenue per available seat kilometre. Moreover, the number of corporate agreements has been increased. The cost development of plus 3.2 percent for the first quarter of 2009 stems primarily from the reverberating effects of the previous year. These include standard wage increases and as previously mentioned hedging transactions for fuel. Other operating expenses decreased by 5.9 percent. -4-
Another positive effect are the savings obtained by "rejuvenating" our fleet. By the end of 2008, we had taken our last ten Fokker 100s and all ten Boeing 737-300s out of service and replaced them with younger, more fuel-efficient aircraft. The average age of Air Berlin's fleet was thus reduced from 5.2 to 4.6 years. The participation of the Turkish ESAS Holding A.S., which has acquired 15.3 percent of the company's shares, also contributed to stabilizing our business. Inter alia, ESAS Holding A.S. operates Pegasus Airlines, thus opening up new business opportunities for Air Berlin. Equally important is the planned further expansion of the flight route network, via the acquisition of TUIfly's city connections. In the context of this acquisition, a subsidiary of TUI Travel PLC holds an interest of 19.9 percent in Air Berlin PLC, and, vice versa, Air Berlin holds an interest of 19.9 percent in TUIfly, via a holding in Hapag Lloyd Fluggesellschaft/Hapag Lloyd Express GmbH. As of October 2009, we intend to charter 17 aircraft from TUIfly via a wet lease, which means including the crews, and operate these on city connections that ideally complement our existing flight routes. In this manner, we will strengthen our position at the Cologne and Stuttgart airports as well as in Italy and Austria, and our corporate clients will have an even more attractive flight network at their disposal. No additional cash outlay is required on our part. However, the transaction is subject to approval by the German Federal Cartel Office. Our time schedule is set up so that the arrangement will not add additional stress to our planning. As a matter of form, I would also like to mention that the integration of dba, which was acquired in 2006, has been completed, and that, with regard to LTU, which was acquired in 2007, we are currently on the home stretch. Improved management and higher capacity utilization have enabled us to significantly improve revenue on the retained long-haul flights and to render the company more efficient. The foundation of our two new technical companies, one of which being the Düsseldorf-based technical company that has taken over more than 800 former LTU employees, has also increased efficiency. We have adapted the staff of the Air Berlin Group to our flight capacity, and will continue to do so. A hiring freeze has been in place since last year. Moreover, we do not routinely fill every vacancy. Nevertheless, we are not stepping away from our social responsibility towards our employees who built up Air Berlin and made it into what it is today, namely Germany's second-largest airline company: A company that can proudly look back on a 30-year history. If we were to lay off qualified employees today, we would have to hire them again in the future, once business improves. Many signs are currently indicating that the economy will at the latest take off again in the coming year. -5-
However, it is not my intention to keep you waiting until then. Already this year, we intend to lower our debts, improve our liquidity, and present you, our Shareholders, with results that are better than last year's. The capital increase approved last week is also a step in this direction. The fact that the additional shares were placed within three hours of their issuance proves that the market honours Air Berlin's business strategy. Even otherwise highly critical media saw the transaction in a positive light. "In times of crisis, Air Berlin does not request help from the State, but strengthens itself by raising equity," was the overall tenor of the comments. Therefore, in good conscience, I am hereby requesting your continued trust and confidence. Ladies and Gentlemen, thank you for your attention! -6-