Air Berlin, the discount airline that is Germany's second-biggest carrier and Europe's seventh-largest by passenger numbers, said Tuesday it is filing for insolvency.
The news ends months of speculation over the indebted carrier, which had posted ever-wider losses money in each of the last four years, and which had struggled to maintain operations this year after taking drastic measures last September to cut costs and stay airborne.
The company said in a statement to the Frankfurt Stock Exchange that it had had no option after its largest shareholder, Abu Dhabi-based Etihad Airways, refused to offer any further financial support. As recently as June, the company had insisted it had "sufficient liquidity and a reliable partner, Etihad," according to AFP. Bloomberg reported in May that Air Berlin's own annual report had said Etihad was committed to supporting it for at least another 18 months, including $382 million of new money.
Etihad owns just under 30% of Air Berlin's holding company. It had bought into a number of European airlines in recent years, hoping they would drive long-haul traffic to its hub in Abu Dhabi and also support its efforts to break into the U.S. market. However, that strategy has unravelled as losses proved too heavy to sustain. In May, Italian flag-carrier Alitalia went into bankruptcy proceedings, leaving Etihad sitting on a loss of nearly $2 billion. Etihad didn't respond to a request for comment from Fortune.
Air Berlin said it has entered into talks with Lufthansa regarding the sale of "parts of the airberlin group," but a Lufthansa spokeswoman wasn't immediately able to say which parts the flag carrier wanted to buy.
Lufthansa has a more direct interest in not letting Air Berlin go into liquidation. Under the discount carrier's restructuring last year, it is leasing 38 Airbus A320s on a "wet lease" that includes flight crew, maintenance and insurance. Given the overall buoyancy of the European airline market, it's unlikely that Lufthansa could replace that capacity cheaply.
More controversially, Germany's Economy Minister Brigitte Zypries said the federal government had extended a three-month credit line of 150 million euros ($177 million) to avoid a disorderly bankruptcy procedure that could have left thousands of customers stranded abroad at the height of the tourist season.
Shares in other European airlines rose in response to the news. Companies such as Ryanair and Easyjet have warned about excess capacity on their routes in recent earnings statements, and the exit of Air Berlin from the market would reduce the pressure on them to keep fares down. Ryanair's stock was up 2.3% in mid-afternoon in Europe, while EasyJet was up 3.2% and Lufthansa was up 3.4%.
However, Ryanair was still far from happy, alleging that the government loan amounted to illegal state aid.
"This is clearly being set up for Lufthansa to take over Air Berlin...in breach of all known German and EU competition rules," Ryanair's head of communications Robin Kiely said. "The German government is supporting this Lufthansa-led deal with €150m of state aid so that Lufthansa can acquire Air Berlin and drive domestic air fares in Germany even higher than they already are."
A spokesman for the European Commission declined to comment immediately.
UPDATE: This article has been updated to include comment from Ryanair, Lufthansa and the European Commission, and add to detail regarding the degree of government support.