No, Lufthansa is not done with its COVID debts

Like all airlines, Lufthansa could not have survived the health crisis without massive aid. But to everyone’s surprise, it was one of the first to announce that it had paid them back. But beware of easy shortcuts: this does not mean that the German airline is out of debt, far from it.

The Lufthansa rescue plan

Remember that the Lufthansa Group received €9 billion in aid, including €5.7 billion for Lufthansa alone, via Germany’s Economic Stabilization Fund (WSF) and private banks. This was accompanied by the German government raising its stake in the airline to 20%, and appointing two state directors to the airline’s board. However, the French government has promised not to interfere in the management of the airline.

The WSF had also agreed to sell its shares in 2023.

A rescue that could not have been taken for granted. Privatized since 1997, Lufthansa took a dim view of any government interference in its management, to the extent that it almost refused the aid, especially as Europe demanded what it considered to be exaggerated quid pro quos.

In our opinion, this rescue was better negotiated than that of Air France, but more on that later.

Lufthansa repays aid

Given the context, it came as no surprise when we learned last November that the German airline had reimbursed all the aid it had received.

There is no magic formula: the German airline managed to achieve this because it only used part of the aid (just under 4 billion), it has raised 1.5 billion on the markets and proceeded with a 2.2 billion capital increase, its business has recovered well, and that it has been able to drastically reduce its costs.

Details according to our information :

2.2 billion capital increase: shares created for the occasion and purchased by private investors.
Borrowing of 1.5 billion (mainly bonds) on the markets from private investors.
0.1 billion euros from its own funds.

And that’s how the 3.8 billion of the 9 billion granted were repaid.

At the same time, Lufthansa has been hailed as an exemplary airline, in contrast to others such as Air France, which are not in a position to repay and will not do so for some time to come.

But such reasoning is a little simplistic: Lufthansa hasn’t reduced its debt, it just prefers to owe money to the markets rather than to the State. Or at least, it has only partially reduced its debt: only the bonds are considered as debt, unlike the capital increase.

Lufthansa has its hands free

This changes two things.

The first is that it is more in line with the airline’s management philosophy. Remember what CEO Cartsen Spohr said at the time: “Lufthansa has had the best three years in its business history. If it is to succeed in the future, it must continue to be able to shape its destiny in an entrepreneurial way“.

The second is that it finally has its hands free. Not only will the WSF sell its shares by 2023 or even before, now that its presence is no longer needed, the state directors will leave its Board of Directors and, above all, it will be able to invest in other airlines if it wishes.

Lufthansa, like Air France, was forbidden to invest in another airline until it had repaid the public aid it had received. Today, it can, if it wishes, take part in the necessary consolidation of the sector and play the equity card.

This is a major advantage. Or rather, a real handicap for the only major airline still dragging this ball and chain, namely Air France KLM.

What about Air France KLM?

In fact, of the three major European airlines, IAG (British Airways) was granted an unconditional loan, Lufthansa got rid of the conditions imposed on it and, unlike Air France, neither was required to meet any ecological targets.

Today, what’s worrying about Air France-KLM’s situation is not so much its indebtedness – Lufthansa obviously has a similar level of debt – but the fact that it is unable to get out of this loan, which comes with environmental conditions that its competitors don’t have (and there’s no turning back unless Europe declares the ban on short-haul flights illegal), prohibits it from paying dividends and, above all, from taking shareholdings. It’s not a neutral topic, given the recent talk of a desire to acquire a stake in the new ITA, which is currently looking for partners. And joining Skyteam and making agreements with Air France will not prevent the Italian airline from falling into the arms of Lufthansa should it decide to come up with a nice cheque.

Today, as we suspected from the outset, Air France, unlike Lufthansa, is unable to repay its loan, which it has used in full. While 500 million were repaid in December, the remainder will theoretically be repaid in 2023, 2024 and 2025. Europe has agreed to this delayed reimbursement.

In the meantime, the airline will also have to recapitalize itself once again on the markets, as the French government has clearly indicated that it does not wish to increase its stake in the airline’s capital.

But will the markets have as much confidence in Air France to get out of debt as they do in Lufthansa? It’s all going to come down to this, because while its German competitor can take a breather and look ahead, Air France is still a major sufferer.

A large, sick company that no longer has the right to play a role in a market that is consolidating, and in the long term this may be its main problem.

Image : Lufthansa fleet by Markus Mainka via Shutterstock