Critical Analysis of Air Berlin Airline Analysis of Air Berlin Airline

Introduction
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Since the fierce competitions among members of the airline industry, some small and medium company gradually reduce the prices as their selling point such as Ryanair, EasyJet and so on. As many travelers simply want to quickly and safely to reach the destination, do not need very advanced services, those low cost airline companies have naturally won customers perception that the prices offered very low. And therefore low cost airline has stable expanded in the market (Mason, 2002). Malighetti et al (2009) mentioned that Pricing has always represented an important factor in the carriers choices. However, different strategies have been respectively used by various low cost and full cost carriers to attract more customers. For instance, full cost carriers focus on services, diverse classes seats and customer loyalty. They believe that customers would come back again if they are satisfied with given services. On the other hand, low cost carriers choose pricing strategy as a differentiation method. Although the services from low cost airline are not as good as traditional airline, they can buy the cheapest ticket to travel around European destination (Malighetti et al, 2009). This report would mainly focus on Air Berlin which is Germany's second largest airline and then presenting a detailed analysis of it.

Overview of Low Cost Airline Industry

Low cost airline operates at very low price strategy with valuable additional services whereas traditional airline provides full services with higher prices. LCA was first appeared since the start of deregulation in late 1990s. Furthermore, LCAs are gradually winning a place in recent aviation market. In fact, LCAs even lead the market in some European countries such as Spain and Poland. Figure 1 show its market share has grown stably from 5% in 2001 to 32% in 2008 over past decade (Roland Berger Research Unit, 2010).

Figure 1. Development of demand for Air Travel in Europe

Critical Analysis of Air Berlin Airline

Overview of Air Berlin
Air Berlin is Germany second-largest airline (behind Lufthansa). According to its website (AirBerlin.com, 2012), it begun as a charter operator in 1979 and it has now serving 239 airports in 77 countries with contemporary fleet of 170 aeroplanes. Although it has recognised as a low-cost airline (LCA) or low-cost carrier (LCC), it operates differently from other LCAs. For instances, customers of most LCAs must pay for additional services, however, additional services such as free snack, drink and newspapers without charge are included in their services when use Air Berlin for their journey (Mallorca, 2012). It was founded by former Pan Am captain Kim Lundgren in USA in1978 and became Germany registered airline as Air Berlin GmbH & Co. Luftverkehrs KG and Joachim Hunold became its CEO in 1991. In 1997, Air Berlin joined IATA (International Airport Transport Association) the company also moved away from charted and towards scheduled flights to major European cities. Furthermore, Air Berlin was the first Germany airline which provided domestic routes within the UK connecting London Stansted airport to Manchester and Glasgow in December 2005 (Air Scoop, 2007) In recent years, the company has rapidly expanded in airline industry by acquiring and merging the stocks of other airlines. They are called as Air Berlin Group which includes not only Air Berlin, but also the Austrian airline NIKI (49.9 % in its stocks) and the Swiss airline Belair (49 %) (AirBerlin.com, 2012). Moreover, it is expected to become the 14th member of global airline alliance oneworld in the early 2012. It can be benefited from alliances network, which contains many major airlines around the world such as British Airline, Japan Airlines, and Cathay Pacific and so on, to expand its destinations count roughly to 900 when it becomes a member of alliance. Air Berlin, in preparation for joining the alliance, has offering codeshare flights with American Airline to import American market whilst it also provide codeshare flight with Finnair and other airline in the Europe (Dunn, 2010; AirBerlin.com, 2012; Oneworld, 2012).

Financial analysis
KEY FINANCIAL FIGURES
Q3 2011
Revenues (EURm) thereof:ticket sales(EURm) EBITDAR (EURm) EBIT (EURm) Consolidated profit (loss) (EURm) Profit (Loss) per share (EUR) Total assets (EURm) Employees (30 September)

9M 2011 3,273.3 2,875.7 385.9 (123.7) (134.3) (1.58) 2,558.4 9,209

Q3 2010 reported 1,241.2 1,151.4 336.4 171.7 135.9 1.60 2,569.1 8,934

9M 2010 pro forma*) 2,935.7 2,700.5 506.2 37.4 (23.7) n.a. n.a. n.a.

9M 2010 reported 2,809.1 2,576.3 504.7 44.8 (14.6) (0.17) 2,569.1 8,934

1,375.5 1,218.3 269.3 96.8 30.2 0.36 2,558.4 9,209

Table 1. Key Financial Figures of Air Berlin

Critical Analysis of Air Berlin Airline

Figure 2. Stocks of Air Berlin over 2011 According to the International Monetary Fund (IMF), the global economy was in a dangerous new phase. It shows clear signs of weakness and lack of confidence among market participants (Schneider, 2011). For that reason, the shares of Air Berlin have also dropped as global economic crisis. Another reason is that, Europe in particular, faced a significant decelerate on its economic performance. Furthermore, economic performance always shows directly impact on tourist industry. Unsurprisingly, the stocks of aviation sector, which are highly sensitive to economy trend, have a considerable declined over past periods. As a result, the stocks of Air Berlin started at EUR 3.78 on the first trading day of 2011 and falling 32.3 per cent to EUR 2.58 in the third quarter since the start of the year (Air Berlin, 2011). There is another major reason why the stocks of Air Berlin were declined dramatically; the aviation tax was first introduced in Germany at the beginning of the year. It hugely burdened them; they had to pay 170 million this year which is approximately four times more than their major competitor in Germany. Consequently, as shown above, the revenues on either third quarter or the 9th month this year are higher than last year. However, their profit was still lower than last year this period. Although the stock was affected by the global economic environment, however, they still having a stable growth thought joining the alliance oneworld and expanded network. They have hired more employees than last year which mean they need more professional person to look after and help their grown business. Mehdorn, the Chief Executive Officer, has mentioned in their financial report that they could not achieve the goal in 2011 due to the factors above, but they will continually provide best services to tourist and business travellers at attractive prices and increase long-haul routes though membership in the network of the alliance oneworld.

SWOT analysis
Strengths 1. Air Berlin has its own flight school Air Berlin Flight School to train those who are willing to be a pilot. Furthermore, it is able to constantly effectively maintain the abilities of its pilots and ensure a stable supply of its pilots. As a result, the pilots could be retrained for new aircraft which they have bought from both Boeing and AirBus which are two main aircraft suppliers (Moltesen et al, 2008).

Critical Analysis of Air Berlin Airline

2. Air Berlin began its operating as a charter airliner; they are able to look after leisure, business and tourist travellers after its reposition itself as a scheduled low cost airline. 3. Air Berlin operates different from other LCAs which passengers have to pay for additional services. The customers of Air Berlin are offered free snacks, drinks and complimentary newspapers; they have also provided some extra services at reasonable fares. What is more, the cabin crews treat customers with highly respect. 4. Frequent flyer programme, the customers are able to collect miles to obtain more rewards. This strategy is commonly used by traditional airline but LCCs. In addition, collecting miles programme is extremely advantageous for building customer loyalty. The two major European LLCs, Ryanair and EasyJet, do not use this programme. By contrast, Air Berlin could use this advantage to maintain customer loyalty (Klophaus, 2005). 5. Air Berlin will become the 14th full member of global airline alliance oneworld in early 2012. They will be able to benefit from its approximately 900 destinations around the world and vice versa. 6. Air Berlin is a combinational model of low-cost airline and full-service airline (traditional airline). Its competitive pricing strategy and quality services are difficult to be emulated for other LCAs, it effectively positioning itself (Air Scoop, 2007). Weaknesses 1. Acquiring airline NIKI and Belair would complicate organisational operations. 2. Low-cost airlines rely on attractive prices to attract those customers who are priceoriented. However, pricing strategies could be immediately copied by the competitors. In regarding to low cost carriers industry, the power of buyers is relatively higher. Price might be the key concern of consumers. 3. Since Air Berlin join the global alliance oneworld, they must be clear identifying themselves from hybrid model as it expands operations in short-haul, medium-haul and long-haul sectors (Air Scoop, 2007). Opportunities 1. Joachim Hunold, the CEO of Air Berlin, as cited in Moltesen et al (2008) described that most of their customer would likely rebook to fly with them are much higher than their competitors such as Ryanair and EasyJet, because Air Berlin could offer more services than others. 2. Great opportunities in expansion around the world since they will join oneworld in early 2012. Increased destinations would help them to expand their business territory. 3. Air Berlin operates its flights from its main hubs at Berlin Tegel Airport and Dsseldorf International Airport which are most important airport in Germany. And this would help them to be more recognised for the travellers from other countries (Air Berlin, 2012). 4. Air Berlin Flight School can provide extra incomes and stable supply of pilots. Also, it increases confidence of customers in the safety of flight.

Critical Analysis of Air Berlin Airline

Threats 1. Since the aviation tax was introduced in Germany, they have to pay a considerable amount of money to the government. For instance, they had paid EUR 170 million in 2011. And they still have to pay in each following year which significantly burdens their financial statement (Air Berlin, 2011). 2. Global economic environment downturns directly affect the aviation industry. People reduce their budget on tourism. 3. Directly and strong competitions among the popular routes. Bigger airport charge more fees than regional airport. 4. The impact of Fuel price has been directly effecting to the company operating expenses (Rao, 1999).

PESTLE analysis
Political factors: Airline industry had been constrained by political regulation; Government restricted where airline can play and further aspect of their commodity and limitation of price range (Shaw, 2007). However, the airline deregulation in 1978 was a significant monumental event for low cost carriers especially in Asia, Latin America and the European Union. After the deregulation, the competition between LCCs became much stronger and fierce price war has been spread (Smith and Cox, 2008). Air Berlin, as part of low cost airline, is a beneficiary of deregulation. They are not restricted by the policies anymore. Furthermore, they are able to discover now routes to expand their business as long as they sign the contrast with regional airport. Besides, they can give a full play with many competitors in existing routes which are full of vast business opportunities. Economic factors: Accompanied economic downturn over past couple years especially in the European, more and more people cannot afford the additional expenses on full-service airline tickets and then alternatively look for other options like low cost tickets. Dunn (2009) pointed out that the Airline Business low-cost carrier financial survey showed that those foremost lowcost players not only have exempted the effect of economic crisis but also continually flourishing the budget airline market. Price is more conscious to those consumers who no longer able to afford huge expenses and businessmen who try to effectively use their budgets. Air Berlin could be also benefited from this trend, unlike other LCAs, it offers not only valuable prices but also better services to their customers. For instance, they provide free meal while customers are travelling by air. Furthermore, they have frequent flyer programme such as collecting mile to keep customers coming back again. These competitive strategies could help them to win the customers who are good at calculating. Furthermore, according the figure 1 above, there is clear evidence of LCAs overcome recent economic downturns over past decade (Roland Berger Research Unit, 2010). As a result for the low cost airline industry, this crisis might be another positive turning point. Social factors: With the emergence of low-cost airline, holidays by air was no longer be luxury expenses. It has become more popular that having holiday abroad. Furthermore, holiday could reflect personal lifestyle. Shaw (2007) indicated that individuals expect the

Critical Analysis of Air Berlin Airline

opportunities to discover a new and attractive place, often long-haul destinations when they are having their vacation. Also, he mentioned they do not expect to be treated as part of herd of cattle, low-cost airline could help these people planning their own itinerary without budget pressures. Air Berlin can use this tread as a great opportunity to promote itself. Technological factors: Besides, they have invested large amount of money in new aircraft. For example, they have launched first B373-700 aircraft which was made by Boeing. The interior cabin of this new-generation aircraft was designed for customers comfort. It would be more modern and quieter in comparison with conventional aircraft (Mallorca, 2012). Furthermore, there are two new technologies were introduced by airberlin, the SafeRoute and the GLS. The SafeRoute is software system which helps pilots to land effectively. It will automatically optimise the route and avoid the stack when they are landing. GLS is a satellite-based navigation system. It makes great effort on calculating flexible routes and forecasting the weather conditions to ensure flights flying under least pollution and noise (Air Berlin, 2012). Environmental factors: According to Air Berlin official website, airberlin has constantly invested in the latest technologies and try to optimise their fleet in order to reduce emissions of carbon dioxide. They have already successful reduce 320,000 tones emissions of CO2 in 2009 and again in 2010. In addition, they are keen to find many efficient approaches to save fuel consumption for both economic and ecological reasons. For instance, they reduced the flying speed without obviously increased flying time and optimum routes to shorten flying time. Furthermore, decreasing the loaded weight is another effective idea of reducing fuel consumption. They have mentioned in their website that the trolleys on the aeroplane are made from lightweight aluminium which is 8.5 kilograms lighter than traditional trolley.

Recommendation
1. They must effective use the networks and share the resources of the alliance to broadly expand their business in Asia and America since they will join the global airline alliance oneworld. 2. They must make themselves more recognisable by spending more budgets on advertising in other European countries such as UK, France etc. 3. Air Berlin should try to find more opportunities to spread out their flight school to new geographical locations to seek more talented people who are able to be a pilot. On the other hand, it can also enhance the visibility of companys reputation (Air Scoop, 2007). 4. They could abandon travel agency channel for booking ticket. As a result, they able to save more commission expenses. Furthermore, by directly contact with customers, they could hear the voices of consumers directly and able to identify real requests from customers (Lawton and Solomko, 2005). 5. Frequent flyer programmes should be enhanced to develop customer loyalty. They could provide more rewards such as free tickets, discount vouchers and free airport pick-up services (Chacon and Mason, 2011). Customer loyalty is a major element in

Critical Analysis of Air Berlin Airline

services management. They would be come back again if they are happy with the rewards of frequent flyer customers. 6. Concrete brand image they must clearly promote their brand Air Berlin and effectively introduce the commodity Services and Price. As service is an extremely important product for airline industry, they must take the following factor into account what is customer really need? Air Berlin has constantly emphasised the strategy of Perfect service at competitive prices. It is not only what services were given, but also give what customers really want! Consequently, it will help customers to keep this brand in mind and satisfied with commodity was given (Shaw, 2007).

Conclusion
Once upon a time, low cost airline was represented valuable price, limited services and one-class cabin (high aircraft utilisation). However, Air Berlin, second largest airline in Germany, has offering a high quality product at competitive price to maintain their brand. Unlike other LCAs, Air Berlin behaviours like a hybrid model of traditional airlines and lowcost airlines. Safety now is not only one concern for consumers, services of airline delivered, reasonable prices and levels of comfort are related major factors while they choose airline to fly with. Although LCAs can still have a profitable growth during past decade while economic dilemma has invading Europe and further global market, they must cautiously think about how LCAs define themselves for the future (Fightglobal, 2008).

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Critical Analysis of Air Berlin Airline

References:
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Critical Analysis of Air Berlin Airline

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