Speech at the Annual General Meeting (AGM) Air Berlin PLC (18 th June 2014) Wolfgang Prock-Schauer, CEO airberlin The spoken word takes precedence. 1
I would like to welcome you all very warmly to our Annual General Meeting. Today I report on a year that was challenging for airberlin. We are not satisfied with the operating result of minus 231.9 million euros. Our Turbine Efficiency Program has achieved in full the target contribution of 200 million euros, in terms of revenue and cost. This year, the Turbine Efficiency Program will develop to its full extent - but this is not sufficient in the very difficult market environment to make airberlin sustainably profitable. We will, therefore, re-establish ourselves; and have started a restructuring process. Ladies and gentlemen, airberlin is a strong, established European airline with an extensive global reach! Our home market, the so-called DACH region namely Germany, Austria, Switzerland is one of the strongest economic regions in Europe with a travel market of 155 million flight guests annually. airberlin carries more than 31 million passengers every year and thus has one of the leading positions in the European market. We are the clear number two! We are the market leaders at our hubs in Berlin and Dusseldorf. In addition we have a comprehensive offer in the major cities, e.g. Munich, Hamburg and Stuttgart as well as in many other German cities exists. With Vienna and Zurich all German speaking regions are fully covered. And last but not 2
least Palma de Mallorca, where we continue as in the past to be the leading carrier. The airberlin brand awareness in our home market is equal to that of our competitors. Our high load factor of 84.8% underscores that our airberlin product is cherished by our guests. In the first quarter of the year, the positive impact of the Turbine Efficiency Program is clearly visible. We were able to reduce our costs by more than 8 percent. We therefore showed a slight improvement in the first quarter of the year in terms of operating profit, while revenue fell slightly, due to the absence of Easter sales as these fall into the second quarter. We now fly much more productively than a year ago. We were able to further increase our productivity in the first three months of the year by achieving a larger range of flights with a smaller number of aircraft. In addition, the number of passengers in our partner networks indicates a very pleasing dynamic. We will re-establish airberlin this year. With the successful completion of the comprehensive recapitalisation in the second quarter, we have laid the necessary foundations. This recapitalisation is based on three cornerstones: - First: A subordinated, perpetual convertible bond of 300 million euros from Etihad Airways 3
- Second: An extension of the maturity of the shareholder loan from 2016 to 2021 - And third: New bonds totalling 252 million euros, including an exchange offer for the bonds due to mature this November and next year Additionally, within the organisation, we have set the key strategic agenda. We have appointed Marco Ciomperlik to the Management Board as Chief Restructuring Officer, to coordinate the restructuring and turnaround process. On 1 st July, Götz Ahmelmann will take over the post of Chief Commercial Officer. Götz Ahmelmann has extensive experience in the aviation industry and was, most recently, responsible for European sales at the largest competitor of airberlin. From 1 st August 2014, Helmut Weixler will take over the position of Chief Operating Officer (COO) at airberlin. Helmut Weixler returns to the company as a proven aviation expert, having worked for the airberlin group from 2007 to 2011. Among the initiatives that airberlin has already planned and will implement in the current year, in addition to the continued optimisation of the fleet and route network, and the further utilisation of synergies with partners, there is also the introduction of a new revenue management system, through which we expect a positive impact on revenue. 4
By way of recapitalisation, we have succeeded in significantly strengthening equity capital and liquidity. Thus, significant measures have been taken to provide airberlin with a medium and long-term, sound financial basis. Overall, the recapitalisation has a volume of approximately 550 million euros. Through new corporate bonds that we have placed on the market, we have received approximately 252 million euros. The Euro-bond has a volume of 170 million euros, the Swiss franc bond has a total of 100 million Swiss francs. Of this, 162.7 million euros and 92.7 million Swiss francs - making a total of almost 240 million euros, flow into the company as cash funds. We have used 7.3 million euros and 7.3 million Swiss francs for the conversion of bonds with maturities in 2014 and 2015 into the newly issued bond. The proceeds from the bonds will be used for general corporate purposes up to an amount of 150 million euros, and to refinance existing debt. We will strengthen liquidity and equity sustainably with the transactions of our anchor shareholder Etihad Airways. This is through the following measures: - First: The term of the shareholder loan of 255 million U.S. dollars, of which airberlin can still utilise 121 million U.S. dollars, was extended by 5 years to 2021. 5
- This will strengthen our liquidity position. - We have greatly alleviated our equity capital position through the subordinated and perpetual convertible bond amounting to 300 million euros, which we can book as equity under IFRS accounting principles. This will be disbursed in three tranches. We obtained the first, a total of 100 million euros, in the 2nd quarter, the other two tranches will follow the 3rd and 4th quarter. At this point I emphasise again: There is absolutely no change to the shareholder structure through this recapitalisation! We chose this instrument because it strengthens our equity capital position. Etihad is, and will remain, a minority shareholder in airberlin. Both now and in the future, we, as airberlin, will selfevidently continue to meet all legal and regulatory requirements. Nothing will change in this regard! Based on a strengthened financial structure, airberlin will expand its own strengths this year and re-establish itself to become sustainably profitable. We have built this robust European network into a strong global network. This includes our significant cooperation with American Airlines in North America as well as with our partner Etihad Airways towards Asia. Our partner network includes 18 airlines. 6
With our partners we combine our strong position in our home market with our comprehensive global presence. This strong and world-wide network and its potential provide the basis for us to form the future and to successfully complete the restructuring. I also want to go into more specific detail regarding our partnerships, as they are a central part of airberlin. Cooperation with our largest single shareholder, Etihad Airways, has gone very successfully - as in the first year. The collaboration with our strategic partner continues to show very impressive development, where meaningful cooperation quickly develops a great dynamic. This cooperation will be very well received by the market. In the first year, 2012, with 320,000 joint codeshare passengers we had a greater total than expected. In 2013, the company already had over 560,000 passengers in the joint network. And, with a total revenue of the partners of 200 million Euros, we were able to double our sales in 2013. Other codeshares with partners of the Equity Alliance have also contributed, such as with Virgin Australia or Air Serbia. And this development continues to run very well - as we can see in the first quarter of 2014: in the first three months of the current year, we exceeded the number of passengers in the previous year s first quarter by 12 percent. The joint route operated by airberlin and Etihad Airways is attractive, and is set to become even more attractive by 7
expanding the connections. For example, we are extending the codeshares to India, South Korea, Australia and other key markets. airberlin is also further expanding the connection from the DACH region to Abu Dhabi. As of 26 October 2014, we will commence a second daily service between Berlin and Abu Dhabi, thereby increasing the attraction of the route enormously. Through the increase in frequency via Abu Dhabi with Etihad Airways, there are therefore now 43 destinations, instead of the previous 19. From 1 December 2014, we will also fly from Stuttgart to Abu Dhabi. Together with Etihad Airways airberlin now offers 63 weekly flights from Germany to Abu Dhabi in the winter flight schedule 2014. From Berlin, Dusseldorf, Frankfurt and Munich, it will be possible to reach the capital of the United Arab Emirates twice a day from each starting point; from Stuttgart, a daily service is planned. In addition, we will also connect the Austrian capital Vienna with Abu Dhabi from November 24. These flights will be operated by NIKI which, for the first time in its 10-year history, will offer a long-haul flight. Overall, the airberlin group and Etihad Airways thus offer 70 weekly flights between Germany, Austria and Abu Dhabi. This is an unbeatable range - not only for tourists but also for business travellers. 8
Our partnership with the oneworld airlines, which is focused on codeshares, is developing just as well as the partnership with Etihad Airways. In terms of passenger numbers, we crossed the 1 million mark in 2013. Here, after the first quarter of 2014, we are also well above last year's figures; in the first months of the year, we have already welcomed 14 percent more oneworld passengers than in last year s first quarter. Over the entire course of this year, we therefore expect a very positive development. Within the oneworld, we work very closely with certain companies. All our major destinations in the U.S. are therefore American Airlines hubs. After the merger of our oneworld partner American Airlines with U.S. Airways, we are extending our codeshare program with regard to the USA. Together with U.S. Airways we will offer non-stop flights from Frankfurt to Charlotte / North Carolina, and from Frankfurt and Munich to Philadelphia. A codeshare from Zurich to Philadelphia is also planned. The codeshare agreement will allow us to further improve our services in the U.S. and to offer our guests even greater travel options. Overall, airberlin has 18 Codeshare partners: in addition to partners Etihad Airways, Equity Alliance and oneworld, additional codeshare partners who are not members of any alliance are being added. Let us again take a look at the figures for the year 2013: 9
Through the discontinuation of unprofitable routes, in comparison to last year we have reduced the offered capacity by 6.9 per cent, to 38.9 million seats. The number of passengers only dropped by 5.4 percent, to 31.5 million. Thus, we were able to increase capacity utilisation by 1.3 percentage points, to a seat occupancy rate of 84.8 percent. This is a good basis to further increase our yield (revenue per passenger). Moreover this can be optimized through a new Revenue Management System, that will be in operation as of October this year. In 2013, our yield increased slightly - by 0.7 percent, to 121 euros. This with a revenue per available seat kilometre, which improved by 1.3 percent. We have thereby reduced our fleet by 15, to 140 aircraft at year-end, while continuing to improve our flight schedules. In terms of cost items including fuel, we recorded an increase of 3.9 percent. The following drivers were key here. For one, we had to deal with a stronger U.S. dollar in 2013, compared with 2012. This had an impact of approximately 20 to 25 million euros. Secondly, we witnessed the impact of residual and restructuring costs. Thirdly, and this is evident here, other operating expenses increased. The most important reason is that we made the conscious and correct decision to invest in higher-value distribution channels in order to achieve a higher yield. However, in so doing, we also 10
took into account that this step is associated with higher sales and distribution costs. Revenue decreased by 3.8 percent in 2013. This corresponds to the capacity reduction that we have made. It does not, however, correspond to our expectations. In terms of sales, the EBITAR and EBIT have declined. A crucial reason for this development is that other operating income is also considerably lower. It has fallen significantly, by almost 300 million euros. This is due to the fact that, in 2012, we achieved the one-off item of around 200 million euros through the sale of the topbonus program. The decline in terms of EBITAR and EBIT levels is, again, also reflected in the net income. The financial result was largely stable. The net result last year declined from plus 6.8 million euros in 2012 to minus 315 million euros. Let me outline the course of the year in short: in the first half of last year, our measures began to take effect and we set out successfully. An efficient network alignment corresponded well with pinpointing the right elasticity points on the demand curve. We achieved a yield increase, and were able to significantly improve our seat occupancy rate. This encouraging trend was reversed in the third quarter, in particular due to the heat wave. We were faced with a situation of unexpectedly weak demand, with pricing conditions which no longer matched those of the first half of the year. 11
The pressure on prices rose sharply at the beginning of the third quarter. In the fourth quarter, pricing conditions actually saw a negative development in comparison to the previous year. It is clear to see that 2013 was a difficult and challenging year for airberlin. Despite the Turbine Efficiency Program. This has delivered in 2013 and will reach its full impact this year. The difficult environment for the fourth quarter of 2013 has also had an effect on the first quarter of 2014, with a particular negative impact on price development and turnover. This has declined by a total of approximately 30 million euros; mainly due to the lack of Easter business. In addition there was pressure on the yields caused by market overcapacity. Notwithstanding the price pressure, we have managed to slightly improve operating results. The Turbine Efficiency Program showed its benefits: We could in the first three months reduce our costs significantly - by more than 8 percent in comparison to last year. We have expanded our production in the first quarter, and this has taken place with a fleet reduced by 12 units, compared with the first quarter of 2012. We are therefore now a much more efficient airline in view of fleet productivity, personal productivity and the route network. 12
In the overview of costs, the Turbine Efficiency Program effects can be seen in detail. All cost items are declining. A key driver for the decrease in costs is the fuel. The fuel consumption per ASK decreased. We are one of the most fuel-efficient airlines in the world! With our efficiency programs, we have made further significant progress here and are continually reducing our consumption. But we also have a slight tailwind through a weaker U.S. dollar. We were even able to achieve substantial savings in our infrastructure and leasing costs, which we renegotiated as part of the Turbine Efficiency Program last year. The positive development relating to costs, as well as our increased productivity, have greatly helped us to be able to fully compensate for the lack in Q1 Easter business, and slightly improve our EBIT. Our net profit is approximately 14 million euros lower than the previous year, since we had a non-cash tax transaction of this magnitude in 2012. Ladies and gentlemen, we will re-establish airberlin, and will lead it into an economically healthy future. We have very good conditions in which to do this. First, airberlin is a strong, well-established airline in Europe, the most important aviation market in the world. With our partners, in particular Etihad Airways and American Airlines, we have a global reach. 13
A great advantage is that airberlin is a very well-known name in this strong market. All our customer surveys show that our customers like our product; airberlin is likeable and popular! And we are witnessing a clear upward trend in all of these indicators. Now, we will move ahead at full speed with the restructuring, in order to maintain our position in a market and competitive environment which is full of challenges. And there are many hurdles with which we are confronted. We see in Europe the strong growth of low-cost carriers, which have a different cost structure to airberlin, and who are watching the German market very closely. Railway networks are being developed, and airport capacities are meanwhile becoming limited or exhausted. In addition, regulatory restrictions and burdens are taking hold. Aviation tax remains an enormous burden for us. Restrictions at airports have a direct impact on our business, and the Single European Sky is still a work in progress. All airlines will continue to work together to implement this as soon as possible. We are confronting the challenges. We are focusing in this phase on our strengths- our presence in our home markets, passenger satisfaction and our valuable partner network- and will bring airberlin back to profitability. All areas of our business are being tested, including our business model, which is undergoing a fundamental review. 14
We have created organisational measures to accelerate the restructuring process. We have expanded the Management Board and are being supported by AlixPartners, which has the experience in such matters. We are studying everything closely, and will develop a long-term perspective for airberlin. Through this new structuring we want to create a new sustainable perspective for airberlin. This much I can say today: The markets, that we have built up over the years, are and remain extremely important With new technologies we have an innovative and customer relevant distribution system, that covers all important distribution channels Fact is that the price pressure in the European market is increasing including in particular through the low cost structures of the low cost carriers. The maintenance of high productivity and efficiencies will be a significant factor. One thing is for certain, there are no easy answers with respect to the business model discussion. We are observing a convergence of business models. Each entity muss define for itself its own business model. We will create an overall concept that will be discussed and determined by the Board. We expect to be able to provide more information during the third quarter. 15
With all the potential changes I can assure you, however, that the customer will remain central, and we will be focussing our efforts towards the customer even more intensively. This has always been our core competence, and we will continue to expand on this in the future. Thank you! 16