The airline group spent months negotiating its $10 billion rescue deal, and seems to know exactly what it will take to pay it back.
Fresh from agreeing to a $10 billion stabilization package, Lufthansa’s CEO will waste no time repaying its debts.
Carsten Spohr wants to move fast. The airline has said it is about to talk to unions about restructuring, after posting a first-quarter net loss of $2.35 billion, and has already mapped out a path to what it thinks is the best route to recovery.
That strategy is a combination of rapidly getting its network back up and running, while at the same time reducing its fleet.
“When it comes to our fleet and strategy during the restart phase, we follow clear principles,” Spohr said during Wednesday’s 2020 first-quarter earnings call. “Our aim is to serve many destinations using smaller aircraft and operate lower frequency patterns initially.
“We’ll focus on expanding the width of our network (by resuming flights to cities it flew to before the pandemic), and at the same time minimizing our commercial risks. Once the network is sufficiently wide, we will concentrate on serving high demand markets by reintroducing additional frequencies.”
By September, the airline expects to operate 40 percent of regular capacity, but serve 70 percent of its planned intercontinental destinations, and 90 percent of continental destinations.
In terms of its fleet, there will be 300 fewer planes flying in 2021, 200 in 2022 and then 100 fewer in 2023.
Spohr took time on the call to thank those who made the $10 billion rescue possible — the governments of Germany, Switzerland, Austria and Belgium. But he appears to have begrudgingly accepted help, as it involves giving away a 20 percent stake, and two seats on its supervisory board, to the German government.
“I want to be honest, it has been tough to accept that the Lufthansa Group will not be able to overcome this crisis on its own,” he said.
“For us, this is a basis for a sustainable future. At the same time, it’s a huge debt package, to be paid back in only a few years with interest. In that sense, the package becomes an accelerator, to make Lufthansa more cost efficient, leaner, faster and more cash flow orientated.”
He also happily pointed out the 20 percent was lower than the amount its rivals had ceded.
“The 20% stake was nowhere in our plans, but we’re looking at this stake to be a reality soon. We are still having a smaller government share than all three of our major competitors, Air France-KLM, ILG, and Turkish Airlines,” he said.
Lufthansa is more than an airline group, as it also has its aircraft maintenance division, Lufthansa Technik, and a catering division, LSG.
In the first-quarter results, LSG North America contributed a writedown of $112 million, and is still up for sale.
Lufthansa Technik, however, isn’t likely to be up for sale in the near future.
“Lufthansa Technik is part of or core and close to our hearts, so we will not give that up easily at all,” Spohr said. “We were talking about a partial initial public offering before the crisis… but the market at this point in time is wrong to do any divestment.”
Driving Down Costs
As part of its plan to reduce costs, Lufthansa will renegotiate with airports, which follows similar announcements made by fellow European carriers Wizz Air, Ryanair and EasyJet.
Spohr said contributions to its recovery would be required from all stakeholders, and in particular cooperation from airports and air traffic companies.
He also referred to the headline-grabbing claims the group was managing to burn through more than $1 million per hour during the peak of the crisis.
“When I made those statements, it was surely understood by every member of staff, which was the intention, and every journalist in Germany as well,” Spohr said, adding that figure has since been reduced.
Part of that $1 million per hour was attributed to the airline’s fuel hedging strategy. In the first-quarter results, the slump in fuel hedging contracts produced a $1 billion hit to the bottom line.
“The strategies prevailing with the European airline industry are indeed not effective in a crisis such as the one at the moment,” Spohr said, “but who could have expected this? We’ll consider our long-term hedging strategy to increase our downside risk, but we haven’t made a decision yet.”
Spohr said the four governments’ commitment to helping the airline reflected their acknowledgement Lufthansa was a “top league” player.
It’s now down to the airline to up its game, but it has plenty of challenges to tackle first, including navigating Europe’s border ad-hoc re-openings and unused tickets.
“Currently, flight cancellations mean customers can claim up to $2.8 billion of refunds,” Spohr said. “Despite the success we have in offering vouchers and re-bookings, the remaining risk continues to be substantial.”
The CEO now wants “to avoid layoffs as much as possible to adjust the size of the business” — a contrast to many U.S. carriers right now that are looking to reduce their headcount.
He sees “small-size productivity improvements” as the solution, and having spent months negotiating the rescue package, it’s likely a large proportion of that time was spent working out exactly what those improvements will look like.
Shareholders will hold an extraordinary general meeting June 25 to discuss the rescue deal. A convincing argument will need to be made to reject it.
Photo credit: By September, Lufthansa airline expects to operate 40 percent of regular capacity. Richard Weiss / Bloomberg