Lufthansa reports a slight improvement in its financial and operational results in the second quarter of this year. Thanks to strong forward bookings, it produced a positive free cash flow of €340 million, the first time since the start of the pandemic, but all airlines remained loss-making. The outlook for the remainder of 2021 looks good but depends on a few boxes that need to be ticked first. Lufthansa Group sees slight improvement.

Lufthansa Group reported a €756 million Q2 loss, compared to €1.493 billion last year. Adjusted EBIT was €-952 million compared to €-1.679 billion last year. Revenues were up by 70 percent to €3.211 billion. The operating cash flow was €0.8 billion, an improvement of €1.8 billion over last year. The positive Adjusted free cash flow of €340 million includes a monthly cash drain of 198 million.
The network airlines Lufthansa, SWISS, Austrian, and improved their combined EBIT to €-1.189 billion from €-1.525 billion. Eurowings’ Adjusted EBIT improved to €-108 million from €-183 million. Capacity was up from 26 percent in April to 40 percent in June.

For HY1, the net loss was €1.805 billion versus €3.617 billion last year and the Adjusted EBIT €-2.095 billion versus €-2.899 billion. However, revenues were still down by 31 percent to €5.771 billion. Cash flow from operating activities was €18 million positive for the period.
The network airlines reported an Adjusted EBIT of €-2.450 billion versus €-2.416 billion.

By airline, Lufthansa’s Adjusted EBIT was €-1.710 billion (€-1.708 last year) on revenues of €1.351 billion (-53 percent).
SWISS reported an Adjusted EBIT of €-394 million (€-293 million) and revenues at -44 percent to €614 million. “The slight upturn in business that we have seen in the last few weeks should not disguise the fact that, with further pandemic developments still hard to predict, the situation remains extremely tense,” says SWISS CEO Dieter Vranckx.
Austrian’s Adjusted EBIT was €-201 million (€-235 million) with revenues -42 percent at €187 million.
Brussels Airlines’ Adjusted EBIT was €-143 million (€-211 million) and revenues were at -45 percent to €138 million.

Leisure airline Eurowings produced significant cost reductions, thanks to thirty percent lower overhead costs, fleet streamlining, and a simplified structure under a single Airline Operator Certificate. It reported an Adjusted EBIT of €-252 million (€-358 million), with revenues at -58 percent to €158 million.

Four factors have played into Lufthansa’s hands to improve Q2 results. (Lufthansa)

CEO Carsten Spohr signaled a number of factors that have helped the recovery. Since May, leisure sales took off again. Despite a drop in June, the trend bodes well for Eurowings “which could get back faster on its feet than the network airlines”, said CFO Remco Steenbergen. Lufthansa has just commenced under the Eurowings Discover brand. While volumes might be low, corporate traffic has also picked up by 220 percent in Q2 over Q1.

Then the transatlantic market has soared, with 92 percent more ticket sales between the US and Europe in June since May. This market has been the driver behind the improved Q2 results, said Spohr, with over fifty percent of all long-haul capacity dedicated to this segment. He is optimistic about the full reopening of the transatlantic especially now that the US government has indicated that it is working on a plan that will allow fully vaccinated citizens unrestricted access into the country again.

Lufthansa’s capacity will grow to fifty percent in August and September and possibly to sixty percent in Q4, but this depends on three factors, said Spohr: the reopening of westbound transatlantic traffic, further recovery of corporate travel, and the reopening of Asia-Pacific by the end of the year.

Lufthansa Cargo has contributed very strongly to the Group’s results. It posted a nine percent higher Adjusted EBIT of €326 million in Q2 and even a 131 percent higher result of €640 million in HY1, the highest ever in the history of the cargo airline. HY1 revenues were up by 27 percent to €1.671 billion. The business unit has planned for €70 million in cost reductions by next year by retiring the last MD-11F in October and simplifying the fleet to just the thirteen Boeing 777F. Two Airbus A321P2Fs will operate on behalf of Lufthansa Cargo but under the CityLine brand.
Carsten Spohr indicated that until 2024, there will still be a worldwide capacity gap between belly cargo and full freighter capacity as it takes time for belly cargo to recover.

Another 5.000 employees will have to leave before 2024

While Lufthansa Group sees a slight improvement with more positive results, this comes at a price. Last year, Lufthansa received €9.0 billion in loans and state-guaranteed loans under stabilization measures from the German government. Some €4.0 billion has been drawn down, but the Group has already repaid €1.0 billion. It also raised €1.6 billion in new bonds, €0.7 billion in aircraft refinancing, and €0.4 billion in debt coupons. In July, €1.0 billion was raised through a bond issue.

Lufthansa plans to raise further capital on the markets to repay the government loans, but Steenbergen and Spohr were unwilling to give an indication of when the capital increase will be planned. This depends on the financial markets and on the government, with elections coming up in September. Steenbergen said that Lufthansa will try to raise far less than the €3-4 billion that has been mentioned in the press. Lufthansa has €11.1 billion in liquidity available.

Then there is the restructuring going on that targets cost savings of €3.5 billion in 2024. Steenbergen said that already €1.8 billion of this has been confirmed. A workforce reduction of 5.000 employees in Germany has been realized, with another 2.000 coming up later this year through a new voluntary leave program for which already over 1.000 have signed up.
SWISS will shed 2.000 employees and has completed the restructuring plan in May that includes 500 forced dismissals as it plans for €450 million in structural savings. Brussels Airlines has almost completed its 25 percent staff reduction.

Lufthansa’s plans include another 5.000 job cuts until the end of 2023. (Lufthansa)

This leaves another 5.000 positions to be realized in Germany until the end of 2023. Spohr and Steenbergen said that they are committed to this number, but it could if the recovery goes quicker and more staff is needed. Recent events in the US have airlines seen rehiring staff again in higher numbers to compensate for shortfalls in staffing, which caused cancelations with a number of airlines.

“By the way, we are also rehiring staff at Eurowings and Discover. We will very soon restart our pilot program to train pilots again. In the US, they fired people very quickly, but we actually never really fired as we had short-term schemes and kept people on the payroll. We obviously estimate how many aircraft we will operate in 2024, how many will be operated in the various airlines. Some will be shrinking more, that’s why we are confident the additional 5.000 is still the applicable number. But if it would be too high, we could obviously reduce it”, Spohr replied to Airinsight. If needed, Lufthansa has the flexibility to add fifteen percent capacity at short notice.

The divestment of Lufthansa Technik is under study right now, but Spohr added that Lufthansa will sell only a minority share in the MRO company which is a key asset of the airline group. LH Technik reported a €102 million Adjusted EBIT for HY1 compared to €-122 million last year. Caterer LSG Group also returned to profit (€17 million versus €-195 million). The European branch has been sold and a buyer for the remaining activities is being sought.

Lufthansa wants to increase the share of leased aircraft

More aircraft Discussing fleet plans, Spohr confirmed that Lufthansa intends to lease a higher number than the ten percent it has done until now. It recently leased four ex-Philippine Airlines Airbus A350s and has the two A321P2Fs under a sale and leaseback deal.

Spohr is confident that Lufthansa will receive the first Boeing 787-9s before Christmas, but he will hear the latest on this when he has dinner tonight with Boeing President and CEO David Calhoun. Of the 150 aircraft that the Group plans to reduce, 115 have been finalized. That includes all A380s which will not return to service again, while the A340-600s will only operate until the first A350s with First Class will be delivered. At Austrian, the 767s will have been phased out before the end of the year while the replacement of the 777s is being studied.

Lufthansa is very interested in the Airbus hydrogen aircraft and doesn’t rule out being the launch customer. (Airbus)

Lufthansa is having a look at electric aircraft, which Spohr called ‘exciting’ but they might end up being too small. He is more interested in the hydrogen aircraft that Airbus plans to bring to the market by 2035: “Lufthansa has been a launch customer of almost every second new Airbus type, so it is most likely that we will be a launch customer for the hydrogen plane.” The airline is actively involved in the Airbus ZEROe program.

Austrian remains cautious about recovery

So Lufthansa Group sees slight improvement. On its guidance for FY21, Spohr and Steenbergen said that the Adjusted EBIT will be ‘less than negative”. The operating cash drain should end in Q3, with the EBITDA turning positive again despite €900 million in tax repayments in HY2. Capital expenditures should be around €1.5 billion.

Austrian Airlines remains cautious about a recovery: despite improved results, it is still far away from a normalized situation that might not return until well into 2022 or even longer. “Unfortunately, there is still no end in the way of the pandemic. However, our high adaptability and the consistent implementation of restructuring measures show that it is possible to fly the company successfully through the crisis,” comments CEO Alexis von Hoensbroech.

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