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Lufthansa on verge of bankruptcy without a bailout – official statement

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Shockingly, it appears that Lufthansa has come to the end of the road.

Or, at least, it has come to the end of the road without an immediate bailout of up to €10 billion.  Since this is Germany we’re talking about, you can be 100% certain that the money will be handed over.

It is, regardless, amazing to see one of Europe’s big three airline groups on the brink.

Lufthansa on verge of bankruptcy without a bailout

On Thursday evening, Lufthansa Group issued a trading statment.  You can read it here in English.

There is no point looking at the Quarter 1 trading numbers because they are meaningless given the current situation.  The key numbers relate to the cash position and its immediate liabilities.

The group currently has €4.4 billion of liquidity, which sounds OK.

Monthly cash burn, looking at Citi estimates published yesterday, is €984m.  Not good.

That is just the beginning, however.

The current total due in the next few weeks for:

  • ticket refunds
  • bills due for payment
  • interest and loans due for repayment
  • payments on ‘out of the money’ fuel hedges

…… is estimated at €4.9 billion.  The airline admits that it has no chance of borrowing additional money from banks.  In plain English, the airline is insolvent.

In financial speak:

“However, in view of the business outlook, existing multibillion liabilities related to trade payables and refunds of cancelled tickets as well as upcoming repayments of financial liabilities, the Group expects a significant decline in liquidity in the coming weeks. The Group does not expect to be able to cover the resulting capital requirements with further borrowings on the market.”

But there is good news, unless you are a German, Swiss or Austrian taxpayer:

“The Group is therefore in intensive negotiations with the governments of its home countries regarding various financing instruments to sustainably secure the Group’s solvency in the near future. The Management Board is confident that the talks will lead to a successful conclusion.

Lufthansa on verge of bankruptcy without a bailout

What is weird is that Lufthansa’s shares still appear to have value.

Last year the airline made €2 billion EBIT (profit before interest and tax) but is sitting on €9 billion of pension debt and €7 billion of net debt (pre-crisis, now far higher).  The Government bail-out is estimated at between €3 billion and €6 billion, although on Friday there were discussions of rounding it up to €10 billion.  Add all this up and you are easily looking at €20 billion of liabilities.

The shares have no value unless the business is worth over €20 billion, and that isn’t clear even at €2 billion of EBIT.  Heaven knows how many years it will take to get back to 2019’s €2 billion.

On Friday the airline said that it no longer expected to return to 2019 traffic levels until 2023, and would be firing 10,000 staff and dropping 100 aircraft as soon as it resumes flying.  This is an increase on the estimate a couple of weeks ago when Lufthansa forecast 7,000 redundancies and the retirement of ’70+’ aircraft.

In case you’re wondering, below are the Citi estimates for how long the major European airline groups can last assuming that they continue to pay their bills, refund tickets and pay interest and debt as they become due:

  • Air France-KLM – 3 months
  • easyJet – 15 months
  • IAG (British Airways) – 8 months
  • Lufthansa – already technically insolvent
  • Ryanair – 18 months
  • Wizz Air – 22 months

Comments (166)

  • Wapps says:

    If I were the Dutch, I would use this as an opportunity to rescue KLM from Air France so that it can break free of its clutches. In future, I would have thought IAG/BA is a better partner for it.

    • Lady London says:

      Good idea. Doubt we can do it though.

      • Rob says:

        May happen as Macron has said Air France can have all the money it wants, but very unlikely the Dutch will say the same.

    • Mikeact says:

      The KLM/BA tie up nearly came to fruition some years back.

      • Spaghetti Town says:

        Willie walsh said it was the merger that should of gone ahead. I’ve always found the Dutch to be quite culturally similar to the UK anyway out of all the european countries (excluding Ireland).

    • Heathrow Flyer says:

      Agreed – AF and KLM are strange bedfellows.

  • Spaghetti Town says:

    I went into IAG shares yesterday and it’s reassuring to see 8 months liquidity.

    • Bazza says:

      Life on the edge!

      • Spaghetti Town says:

        Confident IAG will pull through. Virgin, well not so much. I stand more to lose with Virgin as i’ve got 32k unspent miles with them!

  • Chrish says:

    Hmmm Rob, How long can Virgin keep going for !
    Weeks a couple of months
    would be interesting for a update now, or would it be counter productive

  • Nick says:

    Do we believe the Lufty report? I agree they’re probably in a bit of trouble, but effectively bankrupt? I suspect they’ve ‘embellished’ it somewhat in order to push the German government harder.

    I also question how their outgoings are so high. Yes there are costs but it does seem ridiculous they haven’t gone down.

    Anything must be given as a loan, it wouldn’t be fair on solvent airlines if LH were effectively given cash. Germans will also be reluctant to bail out other countries’ airlines so it’ll be interesting to see what happens to OS and SN. And I can see governments insisting on ‘fair’ treatments of refunds, etc. if voters’ money is being used for a bailout.

    Finally, the German government’s willingness to fight for Lufty’s anti-competitive stance over the years is coming back to bite them (same with France). If they had allowed and encouraged proper competition then LH would have had an incentive to be more competitive all along, so they’d be in a better position now without legacy contracts and costs holding them back.

  • Matty says:

    Didn’t Lufthansa, like many airlines, have so much spare cash floating around a few years ago that they bought back their own shares – thus inflating the share price, rewarding shareholders and making the company appear more successful.

    If only they’d had the foresight to put that money to one side for a rainy day then they wouldn’t be going to the taxpayer to keep themselves afloat. Late stage capitalism…

    • Tony says:

      If Lufthansa are technically I solvent how have they over the last few years either been able to buy up any European airline which becomes available or be linked to a host of others?
      Suspect these figures have been massaged to put pressure on the various Government’s with an interest.

      • marcw says:

        Aber natürlich!

      • Callum says:

        Because over the last few years their income hasn’t ever suddenly fallen to €0 combined with the prospect of refunding billions of euros worth of tickets. And banks are more willing to lend money to airlines during strong growth periods than during a global economic crisis and a travel shut down.

        I really thought that would go without saying! What am I missing?

        • TGLoyalty says:

          Nothing. And this is nothing personal to anyone but while many people believe they understand money. They don’t really have a proper grasp of economics, finance and the money markets. I mean I making a living out of it and I still query stuff.

          It’s probably because banks still do silly things like give people with no incomes credit cards with huge limits.

          If we bring this back to an imaginary life but one which isn’t too far from realty for some.

          -You’ve had your normal income put on hold and you’re on universal credit because there’s no furlough scheme for your personal circumstances
          – your rent/loan/mortgage/car payments still need to be made because your providers have said no to pungent holidays.
          – food and utilities are up because you’re at home 24/7
          – yeah you’re saving on trips/nights/days out so that’s discretionary spend right down.
          – you’d put last months expense on credit cards knowing you’d pay it off this month.

          Incoming has gone from £5k a month to £500 outgoing is still £2500, you’ve got £30k in savings that will tide you over for months easy won’t it?

          No, because on top of last months credit card bill you borrowed some money 12m ago on 0% for your house renovation. £3k sofas due this week, £5k bathroom next week, £10k kitchen the week after etc. But you were going to be fine if it wasn’t for COVID19 you’d saved up money to pay it all back and a bit of rainy day money.

          But you didn’t expect to be down to £500 income and now no one decent is going to give you credit when you’ve got £500 a month income, £2500 outgoing and they can see you’ve got £18k of credit payable on your report for the last 12m or so? So it’s either go to bank of mum/dad/family or pay Aqua etc 30% interest to tide you over but you’re technically insolvent anyway.

          Makes it a bit more difficult for companies as they don’t usually get made redundant so it’s not on their radar to have a huge buffer for times of 80% less income and they have a duty to report if a company is insolvent or likely to be insolvent very soon.

      • Rob says:

        Because in a normal world they are flying aircraft and getting money in.

        To be fair, I don’t see why an airline should necessarily be expected to hold back enough cash ‘just in case it can’t fly for six months’. The irony is that if every person and business kept that much spare money sat in the bank the whole country would go into recession.

        • Ian says:

          To be fair Rob, common personal finance guidance suggests you should have at least 3-6 months outgoings in savings before you start spending money on holidays, swanky cars and even longer-term investments like pensions.

          It’s rather sad that we’ve become a society which doesn’t follow the personal savings mantra followed by some other developed nations, so that families are only a couple of pay days away from disaster….although they’ve probably had a lovely holiday.

          • Mr(s) Entitled says:

            It’s not a fair comparison.

            A person can realistically go from 100% income at the start of the day to 0% income by the end after one meeting with HR. A person can become sick and be unable to work. A person might simply have enough and down tools.

            Companies don’t typically go from 100% to 0% in the blink of an eye. At least, not without the writing on the wall for some time. Companies do not get sick. Companies do not voluntary have enough and down tools.

            It is not realistic to expect every company to hold 6mths of cash to cover all outgoings against zero income just in case they need it once every hundred years. The only companies that carry this sort of cash (e.g. Apple) print money, can’t spend it fast enough, and don’t want to bring it on-shore and pay tax. Most other companies need to invest and grow. That is how they create wealth and jobs.

            I do agree with more stringent rules on share buy backs however and how they are funded. I’d rather companies invested and grew. That would also reward the equity holders.

          • Rob says:

            I honestly don’t understand why the US airlines were not forced to do a rights issue, equivalent to their last 3 years of buy backs, as a condition of getting Government soft loans on top.

        • pking says:

          Why not, as a sole trader earning over 50k I’m apparently expected to live off my savings.

          • Rob says:

            The odds of you not being to work for 6 months, for any reason, are SUBSTANTIALLY higher than the odds of an airline not being able to fly for 6 months!

        • The Savage Squirrel says:

          Airlines don’t need to hold 6 months cash. As we’re comparing to personal finance, what they need is the large-business equivalent of taking out a mortgage, then promptly paying back nearly all of it into an offset account (so near zero cost to have the facility open). That way they have a guaranteed line of credit that cannot be shut off by the bank in hard times.

    • Lady London says:

      Not just rewarding shareholders. Usually rewarding the management who will have such profits as a major not-publicly-aired part of their compensation package.

      • David says:

        Yes, but mainly the shareholders, and the obscene obsession and seeming acceptability of carrying massive debts to fund continued shareholder payments. The latter reality should be banned.

        • AJA says:

          David, shareholder dividends are the share in the net profits (distributable reserves) of a business. It is their return for investing capital in a business. Now, as you may know, profits are not the same thing as cash but they should flow through to cash. This is why the accounts include a statement of cash flows which reconciles net profits to cash. And the dividends usually are a small percentage of overall cash. But a business would not borrow cash to pay dividends. This is why it is advisable to not pay dividends if there is a potential that a business might then have to borrow money shortly afterwards, hence the number of businesses that have cancelled dividends recently.

        • Lady London says:

          @David you have accidentally stated so much that also applies to how a lot of the “private equity” industry also works.

  • Mark says:

    Ill informed clap trap.
    Do we really think the German government will let their link to worldwide commence go out of business?
    Can we all stop speculating with negative stories when we know many people on here work in the business and are very worried about the future of these companies.
    I would prefer some positive news!

    • Kev 85 says:

      “ I would prefer some positive news!”

      I had the last cookie in the cookie jar yesterday.

      • Rob says:

        The Pret A Manger on our corner is open again.

        My wife has a found a local greengrocer that does white asparagus (albeit at £24 per kilo!).

        • Pascal says:

          Let me know if you need an emergency Spargel Box. Currently with family in DE during lockdown! (around 12€ per Kilo)

          • Rob says:

            German Deli is £12 per kilo – we just haven’t been very efficient in sorting out delivery!

        • Michael says:

          Germans sure love their Spargel

          • Pascal says:

            Oh yes we do love Spargel, we’ll actually have it tonight too, ha.

            £12 is really good! Enjoy the Spargel Rob.

        • Chrisasaurus says:

          Best get in there with your metal curve cheer them up 🙂

    • Lady London says:

      You’re in the wrong place if you want us to follow “the company line” @Mark.

      But stick around and you will see the combined efforts of commenters tease the situation out to the truth which will be a lot more helpful to anyone with an interest long-term in the business.

    • Spursdebs says:

      The Chinese near my Son has reopened doing a roaring takeaway trade.Lovely food and spotlessly clean. Bad news the chicken wrap shop still shut.

  • The Savage Squirrel says:

    As a sole trader, if I go bust I lose my business, my house and everything else. Funnily enough this means my business is run with a view to all eventualities and retains cash on hand and pre-authorised but unused financing facilities for the unexpected. As a result, despite being in a sector that is forced to completely close shop due to Covid19 (so actually in a worse position than the airlines), I’m not going to go bust any time this year and my employees’ jobs are safe, no matter how slow the reopen; despite the obvious financial losses we will sustain.

    Is this situation an argument against the Ltd company, or for the boards and senior management of larger companies being placed in a similar position of risk of ruin – at least for those companies that are considered too important to be allowed to fail. This would remove the moral hazard dilemma that has now played through the banking sector, still remains, and currently appears to be playing through the larger airlines…

    • Nick says:

      Couldn’t have put it better myself. If big companies need bailing out those at the top should personally be hit very hard, it would stop the excesses of risky behaviour instantly. ‘All the reward but with little risk’ does not lead to successful long-term thinking.

      Similarly with personal responsibility – I really can’t understand why so many people don’t save for a rainy day and immediately expect support from others. I moved to London at 25 and didn’t take a holiday or buy anything ‘nice’ until I’d built up enough savings to last at least 6 months if I lost my job, and I’ve kept that mentality ever since. Obviously some people are low paid and genuinely can’t afford to save, but I’ve seen so many stories of middle class people with ‘nothing’ that it makes me want to scream.

      • Thomas Howard says:

        I think airlines that have been built on debt and added some more for buybacks should be allowed to fail wiping out shareholders. They’re the ones that benefitted from the risk in the good times and they’re the ones that need to discourage risky behaviour in future.

    • TGLoyalty says:

      I would say they pay with their jobs but inevitability they just move along the BoM/Senior Exec merry go round.

    • Lady London says:

      Completely OT @Savage Squirrel have you not thought of incorporating? I would be very uncomfortable with that personal liability if I could not insure it

      • The Savage Squirrel says:

        Incorporating would probably have at least some marginal tax advantages too. To be honest it’s a bit of a hangover as it was useful 2-3 years ago to offset startup losses against other income. Why don’t I change at this point? Slightly laziness but I do value the simplicity, flexibility and privacy you get vs being ltd.

        And to go back on topic – with no separation of business and personal, it of course means you can do all sorts with personal credit cards by using them for business spend 😀 :D.

        • Lady London says:

          Interesting. NOMB but I think startup costs are ok either way, plus you can make depreciation work nicely for some things, reasonable privacy can be achieved low cost, split between personal/business expenses can work better incorporated (also bearing in mind regular employees of companies typically spend from own funds then fill out an expense claim from company etc ), liability, ringfencing of private assets, liability, possible easier movement of assets, liability, and liability. You can keep your current name as a ‘trading as’ I know it doesn’t suit some businesses and owners but with upcoming times… And did I say liability?

  • Lady London says:

    2 interesting things come out of this ( and if course there is no chance of at least Germany not bailing out Lufthansa):-

    This is manna from heaven for any formerly state-owned German enterprise. I am not surprised the announced figures of staff redundancies have increased along with aircraft to reduce. The jewel in that crown is it has been more or less impossible to make staff redundant in any formerly state owned business in Germany even where this is really needed. Unions, contracts, pension and redundancy payments make it an impossible nightmare. (I have worked for 2 such companies. One made two rounds of productive staff in the UK redundant because they couldn’t get rid of cast overhangs of no-longer-needed staff in Germany. So an excuse to get rid of some legacy staff and their costs – or at least use them to blackmail the state – is a silver lining in the cloud for Lufthansa.

    What I can’t understand is how are airlines allowed to run so flakily that they use money paid by passengers for future flights, on current operating costs, in then when they hit a problem theyve already spent the money and can’t give it back? Even though the passenger has not received what they paid for? Why is it not practicable to ringfence passengers money until they have taken their flight?

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