It’s an almost unbelievable situation, one so profound for European and global aviation that its hard to truly comprehend.
Lufthansa Group, the Titan of European Aviation, owner of Lufthansa, Austrian, Brussels, Eurowings, Swiss, Edelweiss and Lufthansa Cargo, Lufthansa Technik and a host of subsidiaries, was in many ways like most people; just one paycheque short of disaster.
The banks are refusing to provide it with more capital, and without credit facilities to keep itself on life support it can’t go on.
It notified the governments of Belgium, Austria, Switzerland and Germany (as well as the relevant state governments in Germany’s Federal structure) that it needs state aid to continue.
Germany is unlikely to decline such assistance, Lufthansa is a huge employer and vital to the German economy.
Quite how the other governments will react is uncertain. Austria will prop up its flag carrier, Swiss/Edelweiss won’t need as much support but is too crucial to the Swiss economy not to get it. Brussels however is another story. There’s been talk of Belgium nationalising the airline in recent weeks and Lufthansa is in such dire circumstances it probably wouldn’t object.
So why is Lufthansa in this place and so desperate when AF-KLM (who are negotiating with the French and Dutch governments for assistance but at a much lower level), and IAG who aren’t even asking for anything, not as badly off?
All of the governments involved are offering airlines and businesses 80 to 100% salary support schemes to stave off mass unemployment in the way its happened out of control in the US.
The problem for Lufthansa is its vast debt.
It’s ‘debt gearing’ is 12.5 times its annual pre-tax earnings. Compare that to AF-KLM at 7.5 and IAG at 4.7, easyJet and RyanAir are under 3.0.
Lufthansa basically already owes so much money that it’s creditors now don’t think it can take on more when it has no income.
It’s spending $1m an hour with no income, and it’s $4.8 billion overdraft is almost gone. Refunds and operating costs are outstripping its capacity.
It’s been warned it’s gearing was high in the past, and it’s been working to reduce its debt, but it could afford what it was carrying. It’s cash was high and it’s income and forward bookings an endless river of income.
Even more concerning, Lufthansa has $10 billion in owned aircraft it could mortgage to raise cash, but nobody is willing to buy them, because they can’t be sure it could afford to pay the leasebacks.
The speed at which Lufthansa and others have succumbed is staggering. Airlines, like so much else in this world economy, have become utterly reliant on the short term – they have legally around 45 days of operations cash on hand they objected 2 years ago to the extension from 30 days forced on them by the EU). The bigger airlines have revolving credit facilities and can borrow heavily based on their vast incomes.
Until the river of cash suddenly stops.
Lufthansa is too big to fail. Everyone knows that, but it’s going to face some hard lessons and needs to get its financial house in better order.