Lufthansa Targets Costs, Sets Profit Goal for Travel Restart
Lufthansa Targets Costs, Sets Profit Goal for Travel Restart
(Bloomberg) -- Deutsche Lufthansa AG outlined ambitious plans to permanently boost profit coming out of the coronavirus crisis by slicing back on labor and overhead costs.
Europe’s biggest airline aims to pare annual expenses by 3.5 billion euros ($4.2 billion) to help it achieve adjusted earnings before interest and tax equal to at least 8% of sales by 2024, according to a statement. That’s a level it achieved just once in the five years preceding the pandemic.
The new targets come as Lufthansa appoints banks to refinance state bailouts. More than half of the savings will be from staff cuts that have been announced but not yet fully implemented, with 10,000 jobs yet to go in Germany alone. The airline also plans to eliminate as much as 30% of office space, renegotiate supplier contracts and trim external consulting and marketing budgets.
The plan should be taken with “an ounce of caution given the high dependency on labor-cost reduction,” said Daniel Roeska, an analyst at Bernstein, pointing to the challenge of getting labor unions to agree to cuts. Clarity will come only next year with union negotiations and possible forced dismissals, he said.
Lufthansa shares traded 1.1% lower as of 11:37 a.m. in Frankfurt and are down 2.3% for the year.
Capital Raise
The airline confirmed that Germany’s WSF stabilization fund, its biggest shareholder, may participate in a planned capital raise that will help refinance a 9 billion-euro state bailout. People familiar with the matter said last month that it’s aiming to garner about 3 billion euros via a rights issue.
WSF is considering selling some of its subscription rights and using proceeds to purchase new shares, according to the statement late Monday, a move that would free taxpayers from committing more cash while shrinking the government’s holding, albeit to a lesser degree than if it didn’t participate.
Lufthansa appointed Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. to help with the capital raising.
Speaking on an analyst and investor call following the announcements, Chief Executive Officer Carsten Spohr said Lufthansa would look to adapt to developments in the post-crisis aviation market. Such moves could involve shifting planes to long-haul budget brand Eurowings Discovery, established to tap any rapid recovery in leisure travel.
Cargo Growth
Lufthansa could also enter the short-haul cargo market with dedicated freighter aircraft, Spohr said. The carrier has used Boeing Co. 777F aircraft to ply such routes as pandemic groundings reduce belly capacity in passenger jets, something that could become a regular feature if cargo yields remain high.
Spohr also gave further details on how he expects summer travel to proceed. Lufthansa now sees passenger numbers at 30% of pre-crisis levels in June, rising to 45% in July and 55% in August, in line with its previous forecast for a 40% figure for full-year 2021.
Demand is particularly strong for Mediterranean holiday destinations and long-haul leisure markets where there are only limited or no travel restrictions.
Supported by the acceleration of bookings, Lufthansa expects operating cash flow to turn positive this quarter. The carrier previously said it expected to lose around 200 million euros per month in the current period, down from the 235 million euros per month in the first quarter.
On Germany’s federal election campaign, Spohr said he doesn’t expect the environmentalist Green Party to be able to move ahead with plans for a ban on domestic flying after slumping in the polls.
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