Air Berlin looks for profit and sells frequent flyer program chunk to Etihad Airways

Air Berlin Plc sold control of its frequent-flier program to shareholder Etihad Airways for 184.4 million euros ($243 million) in a transaction that should help the discount carrier post its first annual profit since 2007.

Air Berlin stock rose as much as 9.9 percent, the most in seven months, after the German company said that Abu Dhabi-based Etihad would buy a 70 percent stake in the Topbonus program, with proceeds to be booked against this year’s earnings.

State-owned Etihad has a 29 percent holding in Air Berlin as part of a policy of investing in smaller operators to help feed long-haul flights and turn its home emirate into a hub for intercontinental travel. The German carrier has been closing routes and pondering job cuts after Europe’s economic slump pushed other short-haul operators in the region to collapse.

“With this step Air Berlin has moved from an emergency situation to a very stressed situation,” said Juergen Pieper, an analyst at Bankhaus Metzler in Frankfurt with a “sell” rating on Air Berlin. The deal, flagged by the German company Dec. 5, is at the top-end of estimates and “really rescues them,” he said.

Loss Turnaround

Air Berlin rose as much as 15 cents to 1.66 euros, the biggest gain since May 11, and was trading 5.1 percent higher at 1.59 euros as of 12:08 p.m. in Frankfurt. The stock has declined 36 percent this year, valuing the company at 186 million euros.

While Air Berlin posted net income of 66.6 million euros in the third quarter, it had been expected to book a loss of 145 million euros for the full year on that basis, according to the average estimate of six analysts surveyed by Bloomberg News.

Chief Executive Officer Hartmut Mehdorn said today at a press conference in Berlin that the carrier will now record a profit for 2012, without specifying by what measure.

The equity element of the Topbonus deal amounts to 50 million euros, of which Air Berlin is contributing 15.6 million euros for its stake, according to Etihad. The German carrier will also get 150 million euros in debt financing arranged by Etihad and provided by HSBC Holdings Plc and Commerzbank AG.

Etihad, the third-biggest Gulf carrier, originally raised its stake in Air Berlin via a $350 million deal including funds for new planes that was agreed late in 2011. The airlines sell seats on each other’s flights under a code-share accord, and allow passengers to redeem air miles on their loyalty programs.

Points for Sale

Under the latest deal with Etihad, Topbonus will be spun off as a separate company with its headquarters in the German capital, Air Berlin said in a statement. The new entity will continue to develop Air Berlin’s frequent-flier program on the basis of a commercial arrangement, and the carrier has the right to acquire 10 percent of the shares from Etihad.

James Hogan, Etihad’s CEO, said in Berlin that the investment is a good one for the Gulf carrier because “the loyalty-program sector is a faster growing and higher margin business than the airline industry.”

In addition to marketing flights, airlines make money from loyalty programs by selling points to credit card companies, hotels and retailers, which in turn hand them to customers who make purchases or use services. Carriers can carry on earning cash even after reducing their stakes as the programs expand or are extended outside the air-travel industry.

Global Plan

Hogan said that taking control of Topbonus will be the first step in the establishment of a “global loyalty management platform” with a critical mass of high-spending customers. The existing Etihad Guest program became a multicarrier setup in June when Air Seychelles Ltd., in which the Gulf carrier has a 40 percent stake, began participating, he said.

Topbonus has about 3.1 million members, compared with 1.82 million at Etihad Guest, while the latter has 173 partners, versus 123 for the German program, the companies said.

Hogan said in an interview on Dec. 4 that he’ll probably halt further equity investments after a couple more deals, most likely targeting Asian traffic. The company also has minority stakes in Aer Lingus Group Plc and Virgin Australia Holdings Ltd., and India’s Kingfisher Airlines Ltd. has said it has held talks over selling a stake. Etihad is also looking at Jet Airways (India) Ltd., an Indian government official has said.

Hogan has also agreed to code-share with Air France-KLM Group, the biggest European carrier, and is looking at a cost- and-revenue-sharing-alliance that might also include Italy’s Alitalia SpA, in which the Paris-based company has a stake.

Germany’s federal cartel office has already cleared the Topbonus transaction, which will close before the end of this year, Air Berlin said.

The year-old alliance between Etihad and Air Berlin has separately delivered more than 300,000 passengers onto the carriers’ networks, 219,000 of them to the German business, the companies said. That’s generated 100 million euros-plus of extra revenue, split equally, more than they had estimated.

Etihad and Air Berlin have also begun implementing a joint procurement plan for fuel and ground services that will bring multi-million dollar savings, they said.

–With assistance from Tom Lavell in Frankfurt. Editors: Chris Jasper, Chad Thomas.

To contact the reporters on this story: Robert Wall in London at [email protected]; Chris Reiter in Berlin at [email protected]

To contact the editors responsible for this story: Chad Thomas at [email protected]; Benedikt Kammel at [email protected]; David Risser at [email protected]