Credit Suisse is forecasting that Lufthansa will make an operating loss of €1.5 billion ($1.7 billion) this year, and is advocating a move toward leasing aircraft as a means of improving the group’s cash position.
The bank had previously predicted an adjusted EBIT of €2.2 billion.
Lufthansa Group made operating profit of €2.03 billion last year. But the group disclosed on 13 March that it would not pay shareholders a dividend in an effort to preserve cash amid the coronavirus crisis.
The group intends to cancel up to 70% of its schedule over “the next few weeks”, reduce working hours for staff and postpone planned investments. Its subsidiary Austrian Airlines will on 19 March terminate all regular flights “until further notice”.
Citing the group’s “high liquidity risk”, Credit Suisse estimates that unit cost across Lufthansa’s network airlines has risen nearly 40% – or almost 50% excluding fuel – as a result of the schedule cuts and declining travel demand. Lufthansa says new bookings declined 50% in the week to 13 March.
Credit Suisse acknowledges that airline earnings are “difficult to forecast” in the current climate and says it is “important that [Lufthansa] and peers are making quick capacity decisions to minimise unnecessary direct costs”.
Nonetheless, the bank describes Lufthansa as “one of the strongest players in the industry” and – noting the availability of support from the German government for companies in distress – suggests that the airline could ultimately improve its competitive position amid the market upheaval.
“Assuming [Lufthansa] ensures sufficient liquidity through this period, while not all competitors will, in time this period may come to be seen as a compelling entry point for an industry leader with strong competitive positions,” writes Credit Suisse.
Lufthansa says it has around €4.3 billion in liquidity and €800 million in unused credit lines. The group adds that it is in the process of raising further funds and that it will use – “among other things” – aircraft financing to generate more cash.
The group notes that it owns 86% of its fleet and that almost 90% of the owned fleet is unencumbered. This corresponds to a book value around €10 billion, Lufthansa says.
Credit Suisse points out that while Lufthansa owns the vast majority of its aircraft, IAG and Air France-KLM lease nearly half and 44% of their fleets, respectively.
“Now is the time to embrace aircraft leasing,” argues the bank. Financing aircraft via lessors would, it says, be a “quick way to ease capex pressure in 2020”, and the airline could raise around €1.5 billion in liquidity if it were to lease nearly half of newly delivered aircraft.
Such a move would “boost market confidence” in Lufthansa’s free cash-flow management, in the view of Credit Suisse. “Adopting an approach in line with industry peers would help highlight to the capital markets that [Lufthansa’s] cash-flow generation is not that far behind those peers,” writes the bank.
A change in Lufthansa’s cash-flow management strategy would meanwhile “represent a move to a more balanced weighing of the interests of shareholders, employees and customers”.
Credit Suisse sees opportunities for Lufthansa to access “very competitive” lease rates as it is “one of the stronger credits in the global market”. The bank adds: “As a major airline that has largely shunned the market historically… our feedback from our industry network suggests likely very strong appetite from lessors to partner with Lufthansa.”
Leasing aircraft might also improve Lufthansa’s ability to manage residual values of its aircraft, the analysts propose.
Additionally, Credit Suisse posits that the group could divest its SkyChefs catering operation and a minority stake in MRO provider Lufthansa Technik.
In December 2019, Lufthansa finalised a deal with GateGroup to divest the European operation of its catering business, LSG. Credit Suisse estimates that the SkyChefs business could fetch between €500 million and €1 billion.
Credit Suisse believes a minority stake in Lufthansa Technik could raise €4-5 billion.
The bank cautions that neither transaction would be feasible over the coming months “given risks to global travel and the likely resultant uncertainty over fair value for either asset”. But it adds: “These businesses could play a key role in helping Lufthansa Group access liquidity if necessary.”
