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Lufthansa seeks government support amid coronavirus hit

Group says it’s in talks with unions and its partners to avoid layoffs.
Image: Moneyweb

Deutsche Lufthansa AG fell with other airline stocks after saying it was looking into government support amid the “immense” fallout from the coronavirus, which could burden travel demand for months.

To avoid layoffs after slashing capacity by as much as 50%, the airline is examining the implementation of so-called short-time work, the company said in an emailed statement to Bloomberg on Sunday.

The shares fell as much as 8.2% Monday in Frankfurt, in line with the German benchmark index DAX amid a free-fall in oil prices and a global equities sell-off. Among other airlines IAG SA, the parent of British Airways, and Air France-KLM toppled to their lowest in more than three years, while Norwegian Air Shuttle ASA sank to a 15-year bottom.

The German work program, known as “Kurzarbeit,” involves the government offsetting wages lost when companies are forced to temporarily halt activities. Chancellor Angela Merkel’s coalition on Sunday loosened rules for short-term work compensation, making it easier for companies heavily affected by the virus to apply.

With some countries restricting flights from Germany, which has more than 800 cases, “the impact on our booking situation is immense,” Chief Executive Officer Carsten Spohr said in an internal memo to employees obtained by Bloomberg. “We must assume that it may take months before we will see first signs of stability,” he said in the message recorded on Friday.

Italy’s decision to restrict movement for a quarter of its population comes on top of the cancellation of large events such as the Geneva Motor Show and the ITB tourism fair in Berlin. The International Air Transport Association estimated carriers may lose as much as $113 billion in ticket sales this year.

Coalition strategy
Merkel’s ruling coalition on Sunday mapped out a strategy to mitigate the damage from the epidemic on Europe’s largest economy, and said it will invest an additional 12.4 billion euros ($14.1 billion) between 2021 and 2024 and take first steps to help companies and workers affected by the fallout from the outbreak.

Merkel’s coalition didn’t agree on other measures like an accelerated phase out of the so-called solidarity tax, which helped pay for unification, or an expansion of funds for state-backed loans and guarantees to ease a cash crunch for companies affected by supply and demand disruptions.

The fallout from the virus risks damaging Germany’s export-oriented economy, which narrowly avoided recession last year and is expected to struggle in 2020. China is Germany’s largest trading partner and German manufacturers, especially in the automotive industry, have deep ties with suppliers in northern Italy, the epicentre of the crisis in Europe.

On Friday, Lufthansa cited “drastic declines in bookings and numerous flight cancellations” in recent days, saying all of its traffic is now affected. The company acted after investors started to question its ability to withstand the downturn. The company’s five-year credit default swaps, which bondholders buy to protect their holdings against a potential default, more than tripled in the last 10 trading days to the most expensive level in seven years.

In his message to employees, Spohr said that Lufthansa has taken steps in the last few days to increase liquidity with the banks. The airline is in talks with governments in Germany, Belgium, Austria and Switzerland, as well as European Union officials, to “reduce burdens on our industry,” he said, without elaborating.

Some relief should also come from fuel costs, with oil markets crashing more than 30% on Monday.

Airlines from British Airways to Japan Airlines had staff members tested positively for the virus already. In the Philippines, local carriers can defer payment of landing, take-off and parking charges for up to one year, the country’s Civil Aviation Authority said today.

Poor ratings
Lufthansa has a credit rating of BBB at Standard & Poor’s, the second-lowest investment-grade rating, and Baa3 at Moody’s, one level above junk.

The German airline group said on Sunday that it’s seeking ways to keep all employees on board during the crisis and is in talks with unions and its partners to avoid layoffs.

Proposals include potential short-time work and part-time models. Lufthansa has already offered its employees voluntary measures, including unpaid leave and bringing forward vacation time.

“Our primary goal is to minimise losses and to secure the company’s liquidity,” said Spohr, adding that “numerous insolvencies” could hit the airline sector in the fallout from the virus.

© 2020 Bloomberg L.P.

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